Time To Tax Our Taxes?

According to the Sioux City Journal, Governor Culver said Tuesday that he “would give ‘serious’ consideration to eliminating federal deductibility as a way to simplify and streamline Iowa's tax code.” This came just the week after Iowa Senate Democrat leaders announced their support for eliminating federal deductibility. Obviously there is growing support in Des Moines for this idea. What does that mean for Iowa taxpayers?

Federal deductibility simply means that, when figuring your state income taxes, you may deduct from your income the money that you’ve already paid in federal income taxes. For most of us, these federal taxes are withheld from our checks. It is money that we never get to see, touch, deposit or spend, so why on earth should it be counted as income?

For many low and middle-income taxpayers who don’t have mortgage interest or property taxes to deduct from their income, federal deductibility represents a significant savings on their state tax bill.

Federal deductibility is a matter of fairness. To eliminate it would mean allowing the state to charge a tax upon a tax.

Proponents of changing the deduction say that it would simplify the tax code. But one already-existing line on the tax form seems to be a worthwhile complexity to assure fairness. If they really wanted to simplify the tax code, they could eliminate the personal income tax altogether like Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have already done. Or they could move to a flat rate personal income tax such as Colorado, Illinois, Indiana, Massachusetts, Michigan, Pennsylvania, and Utah have.

Proponents also claim that the deduction forces the state to charge higher taxes in order to compensate for its lost income from federal deductibility. This argument could also be made against any other state deduction. The watchdog group Iowans for Tax Relief is fond of pointing out that, when “simplifying” the tax code, any promised tax cuts are short-lived while the lost deductions are usually gone for good.

While the idea of eliminating federal deductibility might be popular with those who charge taxes, it is unpopular with the Iowans who pay the taxes. A January 2009 poll showed that 72.5% of Iowans support maintaining their right to deduct federal tax payments.

If you are a member of this majority of Iowans, you can look up your state legislators here and ask them to retain federal deductibility on state income taxes.

Further reading: Public Interest Institute Policy Study No. 07-3 "Federal Tax Deductibility in Iowa: Who Benefits and Why It Should Continue"