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Teaching a lesson in piddly deductions and tax policy

May 14, 2009

The Des Moines Register notices that our crackerjack legislature has caused thousands of Iowa teachers to botch their tax returns:

Iowa educators who took a state tax deduction this year for school supply expenses will be required to pay a few dollars back to the state, tax leaders say.

Iowa legislators this year declined to adopt the deduction filed by many of Iowa’s 30,000 educators, which would have allowed them to deduct up to $250 in out-of-pocket supply costs from their income.

Teachers in the state’s highest earning bracket who claimed the $250 in supply costs would pay back $22.50. Most teachers, who earn less, would owe fewer dollars back.

The Register misplaces the blame:

The high number of filing errors this year stemmed from accountants, tax preparers and tax software that assumed Iowa legislators would renew federal deductions that have been in effect in Iowa since at least 2004.

In fact, the "accountants, tax preparers and tax software" were actually doing what the Department of Revenue told them to do in an e-mail sent to preparers:

If Iowa returns must be filed in the meantime, the Department advises you to complete those returns based upon the premise we will ultimately couple with these federal provisions; with the understanding that an amended return may be required if that premise turns out to be incorrect.

They later changed their mind, but only after thousands of returns were filed.

This fiasco provides two lessons for Iowa tax policy:

1. Iowa should change its rules conforming to federal tax law to automatically adopt federal changes unless the legislature votes specifically against them. It's good tax policy to not make taxpayers compute their income two different ways, and it would avoid this sort of comedy.

2. Iowa should avoid piddly Iowa-only provisions. The cost of compliance and administration for these piddly tax payments will far outstrip any additional revenue the state will generate; if it were an Iowa only deduction, any benefit of the deduction would not worth the hassle.

Tags: Expiring provisions.Iowa tax administration.Iowa tax policy.

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