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IOWA DEPARTMENT OF REVENUE: FOREIGN EXCHANGE POLICE?

March 16, 2007

Just when you think that the Iowa Legislature couldn't possibly find stupider tax legislation to propose, they surprise you. Consider SF 547, introduced yesterday by Dubuque's Senator Michael Connolly. It would add the following to Iowa's tax law:

422.76 TAX HAVENS AND SHELL CORPORATIONS.

In order to assist the department in collecting individual and corporate income taxes and overcome tax avoidance, financial institutions doing business in this state that open an account for a foreign trust or corporation on behalf of a resident of this state or business doing business within this state shall report, on forms approved by the department, the name and taxpayer identification number of any person involved with the account, moneys deposited into the account, and other information deemed necessary by the department.

If the department determines that a foreign trust or corporation was created primarily for the avoidance of taxation within the United States, the department shall treat any moneys deposited into such account as income earned in this state and shall impose the appropriate income tax on such income to the extent the income is not taxable in another state or the trust or corporation establishes beyond a reasonable doubt that the moneys in the account are not income taxable in this state.

There is so much wrong with this bill that it's hard to know where to begin. The bill in effect imposes state-level foreign exchange controls on Iowa businesses and financial institutions - an economic approach usually associated with failing third-world dictatorships.

It would give the Department of Revenue almost unreviewable power ("beyond a reasonable doubt") to impose punitive taxes on offshore investments. Never mind that it's entirely normal to conduct cross-border operations using corporations set up in the country where operations take place. If the sophisticated financial geniuses at the Hoover Building decide you are doing it to avoid taxes, you are out of luck.

Senator Connolly isn't just an obscure legislator, either. He is "assistant majority leader" in the Iowa Senate and he is on the Senate's tax-writing committee, the Ways and Means Committee. That makes this even more astonishing. He really should know better.

Senator Connolly apparently hasn't noticed that multinational financial operations drive a lot of Iowa's economy. Or maybe he just thinks a six-figure job, say, running currency derivative investment operations at Principal Financial Group isn't a real manly job, compared to a union position at an ethanol factory in Dubuque.

A provision like this could kill Iowa's financial services industry dead. But the finance jobs at Principal, Wells Fargo, Nationwide, ING and the other big players in Des Moines aren't union, so they just don't count, apparently. At this rate, the Iowa Legislature might as well just change the motto on Iowa's flag to "Ethanol and union jobs or bust!"

Follow the progress of this bill and all astonishing 2007 Iowa tax legislation at our 2007 Iowa Tax Legislation page.

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