House panel looking at eliminating federal deductibility

By James Q. Lynch 

The Gazette

DES MOINES – Democrats' plan to end federal deductibility in an attempt to drive down income taxes for most Iowans is back on the table.

Although legislative leaders repeatedly have said they don't foresee action on a plan advanced last year to eliminate a provision of Iowa tax code that allows Iowans to deduct their federal income tax payment when calculating their Iowa tax liability, House Ways and Means Committee Chairman Paul Shomshor, D-Council Bluffs, re-assigned the bill to a subcommittee Wednesday.

“We're willing to take a look at any type of tax issue that moves Iowa forward,” Shomshor said.

The fact his subcommittee is taking up the bill when leaders are saying any action is unlikely doesn't reflect a disconnect between leaders and rank-and-file Democrats, Shomshor said.

“While there's not a lot of talk about middle-class tax cuts in the initial part of the session there are a lot of things that have happened around here that may not have been discussed at the beginning of the session,” he said.

That's what worries Ed Failor Jr. of Iowans for tax Relief, which led the opposition to House File 807 last year. Assigning the bill, which was approved by Ways and Means last year, to a subcommittee might be procedural, he said, “but that's the first thing that has to happen to take away Iowans' right to deduct their federal taxes.”

A year ago, Failor added, leaders said ending federal deductibility wasn't on their agenda, but they made a run at it.

“So we have to be on guard and assume that's what's going to happen this year,” he said.

In 2009, Democrats said they would use a projected $505 million windfall from ending the federal deductibility to drive down income tax rates and lower the tax liability of about half of all Iowa filers. Originally, HF 807 was billed as revenue neutral, but responding toe Gov. Chet Culver's concerns, it was rewritten to result in a $54 million tax cut. A couple of Democrats withdrew support then, House Speaker Pat Murphy, because they didn't think the timing was right to reduce income tax revenues given the state budget situation.

However, Failor believes the budget hole created by Culver and legislative Democrats is so deep they will be looking at federal deductibility as a quick fix.

“Last year, they pushed it to the bitter end,” he said. “The budget hole is so big that this is their easiest cash grab.”

Ending federal deductibility would raise about $600 million for the state, Iowans for Tax Relief estimated.

If Democrats pursue the elimination of federal deductibility, Failor hopes they conduct a public hearing to allow Iowans to speak to the issue.

“Sure let's have at it,” Failor said. “That would be good fun.”

Murphy ordered state troopers to clear the House chamber when a hearing last year turned unruly.