Iowa not likely to 'couple' with federal tax code

By Rod Boshart

The Gazette

DES MOINES – Out-of-work Iowans, disaster victims, teachers and others preparing their 2009 state tax returns are getting bad news with the likelihood the Legislature will not “couple” Iowa tax rules with federal tax code changes again this year.

The sour note will hit Iowa taxpayers to the tune of $34.5 million this fiscal year and mean that some Iowans will have to amend their 2008 returns to pay back tax refunds stemming from federal tax breaks they mistakenly claimed last year.

“It's is unlikely we're going to find the ability to give up significant state revenue this year when we're cutting every thing else in state government,” Senate Majority Leader Mike Gronstal, D-Council Bluffs, said Wednesday.

(See relat4ed story at: http://thegazette.com/local-news/2010/03/10/eastern-iowan-lawmakers-seek-to-waive-tax-penalties-interest-for-2008-disaster-victims)

Not conforming Iowa's tax code to federal changes in 2008 or 2009 amounts to a roughly $90 million issue over the two years, said Jim McNulty of the state Department of Revenue.

 “In an ideal world we'd love to couple and make that happen,” added Sen. Joe Bolkcom, D-Iowa City, chairman of the Senate Ways and Means Committee. “It would cost state taxpayers money to go forward with coupling and given the cuts, particularly to education, there's just not enough money to go around to do the coupling this year.”

By not adopting federal tax provisions to the state code, McNulty said there will be at least 10 adjustments that will be required on the 2009 Iowa tax form.

Most notably deductions will not be allowed for higher education tuition and fees, one-time registration fees for certain new vehicles, and state sales/use tax paid in lieu of state income tax, according to the revenue department. The coupling issue does not affect the federal American Opportunity tax credit offered for college costs this year, he said.

Also, provisions of the federal Midwest disaster relief bill will not be allowed; all jobless compensation will be taxable for Iowa, even though the first $2,400 is exempt for federal tax purposes; and taxpayers who claim the earned income tax credit will have to revise their calculation to claim a smaller Iowa credit, McNulty said.

“It's very disappointing for taxpayers in Iowa that can't get their tax credits,” said Sen. Randy Feenstra, R-Hull. “Unfortunately it's taxpayers that share the pain. I see it as a mismanagement of funds over the last three years as the reason why we can't couple today.”

Gov. Chet Culver had included $8.8 million in his budget request to exempt disaster victims for the 2008 tax year but lawmakers say they can't afford any coupling as they forge a fiscal 2011 spending plan.

“Right now we don't have a lot of room in our budget for additional items,” said Rep. Paul Shomshor, D-Council Bluffs, chairman of the House Ways and Means Committee. “We're talking about what we can do, but it's just a challenge with the budget year.”

Lawmakers are working on a bill that would waive interest and penalty for disaster victims who must repay the state treasury, and Feenstra said he plans to amend that to extend that to all Iowans who got caught in a snafu that majority Democratic lawmakers created last year.

Along with disaster-related expenses, federal tax advantages for business equipment depreciation, education-related expenses, college tuition and fees, or certain sales tax charges were not allowed on 2008 state returns -- a coupling issue that carried an estimated state budget impact topping $50 million last year.

The problem last year was the decision not to couple was not known until the Legislature adjourned in late April – meaning tax preparers and taxpayers were given mixed signals with some early-filing Iowans incorrectly claiming the federal benefits on their 2008 state returns while others did not, McNulty said.

State officials estimate that about 20 percent of Iowa taxpayers who were covered by the federal tax breaks took unauthorized deductions on last year's state returns.

Culver stepped in last year and directed state revenue officials to temporarily delay any enforcement against taxpayers who claimed disaster-related credits on their state tax returns that were not validated by Iowa lawmakers until the issue could be addressed this session.

Now, with no coupling action expected this session, McNulty said state tax collectors would begin compliance work this summer or fall by contacting taxpayers who may owe the state money for disallowed tax breaks they may have claimed on last year's Iowa returns.

“We're going to keep pushing on any number of important policy issues that are left,” Culver said Wednesday. “Whatever we can do in terms of saving taxpayers more money through some tax reform, I'm in favor of that.”