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February 17, 2008

The big tax news out of the Iowa Legislature last week was the introduction and speedy passage by the House of HF 2233, the big tax giveaway for Microsoft.

Meanwhile, the Iowa Senate was quietly passing another bill that affects every business that files an Iowa tax return. SF 2123 is the annual bill that updates Iowa's tax computations for changes in the Internal Revenue Code. This one updates Iowa's tax law retroactively to the beginning of 2007 for changes made in the federal law up through January 1 of this year

That's all fine, but the federal government has made an important change in business tax rules not covered by the Iowa bill: the "bonus depreciation" and increased "Section 179" deductions in the economic stimulus bill. Unless Iowa updates its "code conformity" rules, businesses will have to compute depreciation and asset writeoffs using different rules for their federal and Iowa taxes.


That happened in 2001 when Congress last tried to goose the economy with bonus depreciation and extra Section 179 deductions. Iowa initially refused to match up with the federal rules. Businesses got so annoyed that the legislature finally conformed to the federal rules in a special 2004 session, but it never did match up the rules for 2001 and 2002. Taxpayers are still battling the Department of Revenue as a result.

The Legislature didn't want to go along with the federal rules in 2001 because they were more generous than the rules they replaced. In other words, they needed the money. They need it even more this year. Last week legislative Democrats announced the death of the Governor's only big revenue-raising proposals, combined corporate reporting and the bottle tax, so it's back to the drawing board to find ways to pay for last year's spending spree. With receipts slowing with the economy, they have a problem.


The legislature will be sorely tempted to "de-couple" Iowa's depreciation computations from the new federal rules to help raise some of that revenue. While legislative leaders and the Governor have said they won't tax the "rebates" in the stimulus plan, they've so far been silent on the depreciation rules.

If Iowa "de-couples," they will add force every business to spend time and money keeping two extra depreciation schedules, and then answering brainless Department of Revenue notices a few years later when the depreciation computations "turn around" and the Iowa deductions exceed the federal write-offs.

Let's hope the legislature doesn't make the same mistake this year that they made in 2001. So far they find it much more urgent to appease Microsoft than to pass a bill that affects every business in the state.

Follow the progress of tax bills through the Legislature on our 2008 Iowa Tax Legislation page.

UPDATE: They really do want to screw this up:

House Speaker Pat Murphy, a Democrat from Dubuque, says Iowans will not pay state taxes on those federal rebate checks headed their way, but Murphy suggests the state can't afford to be as generous as the feds when it comes to the business tax break for equipment depreciation. "We're not like Washington, D.C. We can't print money," Murphy says. "...We are going to be fiscally responsible. We're going to be prudent. We're going to look at what we can afford to do and what not to do."

Murphy says Democrats who control the legislature's agenda will make a decision about that business tax break "later" -- perhaps as late as 2009. "We're not going to make any guarantees at this point," Murphy says. "...Stay tuned."

If you can't print money, maybe you shouldn't be giving it away to Microsoft and Google.

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