DES MOINES | Iowa taxpayers could have the option of deciding whether they want to deduct their federal taxes from their state tax liabilities or simply pay a lower flat state income tax rate – whichever worked to their individual advantage – under an idea that Gov. Terry Branstad said Tuesday is in the preliminary “discussion stage.”
Branstad said he likes the concepts of giving Iowa taxpayers a choice and of taking a step toward improving Iowa’s competitive position with other states that do not have federal deductibility but are able to market a lower effective tax rate when attracting businesses and workers. Currently, Iowa’s top marginal income tax rate is 8.9 percent but ends up in the 6 percent range after federal taxes are deducted.
The governor said he is working with GOP legislators to formulate a comprehensive tax reform package for the 2013 legislative session. The measure would seek to lower the rate paid by commercial and industrial property owners, limit the tax increase for agricultural and residential property classes and provide individual and corporate income tax relief as ways to return surplus state revenue to Iowa taxpayers.
“We’re trying to look at how can we become competitive in all those areas,” the governor said.
“One of the things that I think we should look at is the option to give the taxpayer the choice” whether to apply federal deductibility to state individual or corporate tax liabilities or whether to pay a lower flat tax rate with fewer deductions, he told members of the Iowa Partnership for Economic Progress Board. “You can have the present structure or you can have maybe a flat rate that doesn’t have as many deductions.”
He did not specify which deductions could or could not be applied under the flat rate option or what flat rate he would propose. “We’re running the models and looking at it, so we don’t know what the rate will be,” he told reporters.
The Muscatine-based group Iowans for Tax Relief has opposed ending federal deductibility, contending Iowans should not have to pay a tax on a tax. Branstad noted that his current chief of staff, Jeff Boeyink, is a former ITR executive and “very familiar and knowledgeable” on the issue.
“We haven’t made any recommendations. We’re looking at all the options and looking at what would be the most attractive,” the governor said. “We think maintaining the option of having federal deductibility or giving the taxpayer a choice, it kind of gives the taxpayer the best of both worlds. So we think that could be an attractive option.
“But, obviously, before we make any decision for a final recommendation we will certainly consult with Iowans for Tax Relief and many other people in this process,” he added.
Iowans for Tax Relief did not immediately respond to a request for comment Tuesday.
Two years ago the governor proposed lowering Iowa’s top corporate tax rate from 12 percent to 6 percent, but the idea stalled. On Tuesday, Debi Durham, director of the Iowa Economic Development Authority, said cutting the state’s corporate tax rate by half during the 2013 session would put Iowa roughly in “the sweet spot” of competing with other states and would curb the need to provide hefty state tax credits to attract projects by abating their potential Iowa tax liability under the state’s single-factor corporate income tax system.
Adam Mason of the Iowa Citizens for Community Improvement Action Fund said his group looks forward to the full details of the governor’s tax proposals. But he added: “It is telling that Branstad is testing his tax plans with corporate CEOs rather than everyday Iowans across the state. He has shown time and again that he is more concerned with campaign donors and corporate interests than the needs of hardworking Iowans. Any tax plan he submits will need scrutiny to ensure it closes corporate tax loopholes, not creates more of them.”