Federal Deductibility on the Chopping Block

A Senate Ways & Means subcommittee met this morning to discuss the highly controversial bill to eliminate the federal deductibility. Senate Study Bill 1317 would eliminate the ability for individuals to deduct their federal taxes before they compute their state taxes – requiring Iowans to pay a double tax on their income. The bill’s proponents claim that it reduces taxes for about two-thirds of Iowans and it has no impact on the state’s revenue. This is not quite the case.

At the meeting, Iowans for Tax Relief said that the bill may be revenue neutral to state government, but not so for individuals. The bill will raise taxes for Iowans making more than $125,000.

John Gilliland with the Association of Business and Industry pointed out that a vast majority of employers in the state are S-corporations, partnerships, sole proprietorships, and LLCs which are all pass-through entities that will be adversely affected by this bill.

Dave Roederer with the Iowa Chamber Alliance pointed out that there would be a tax increase on 450,000 Iowans, no change for 242,000 Iowans, and 667,000 would see a decrease in taxes. He suggested that the Senate figure out a system where everybody gets a decrease or no change at all.

Senator Herman Quirmbach (D-Ames) is worried that under the current system, when federal taxes go up because the Bush tax cuts expire, people will have more to deduct from state taxes and state tax revenue would go down. Iowan’s federal income tax liability is expected to increase by $160-$180 million after the December 31, 2010 expiration date.

American Federation of Labor is in favor of the bill, and claimed that it simplifies the tax system and won’t affect most people as the average income for Iowans is $47,000. However, when these individuals lose their jobs because their small-business employers can’t afford to stay in business or the tax increase is passed on to the consumer, all Iowans will begin to feel the effects.

The House has a similar bill that passed out of the Ways & Means Committee Monday night. For a breakdown of the tax affects of the House Bill click here. A public hearing on HF 807 will be held in the house tonight from 7:30-9:00P.M.