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The Governor returns to a familiar return

January 14, 2011

Terry Branstad becomes Iowa's Governor again today after a 12-year break. If Rip Van Winkle, CPA had gone to sleep preparing a 1999 return after Tom Vilsack took office and woke with a fresh 2010 Iowa 1040 in front of him, he could get right to work. Even the rates are unchanged, except for inflation adjustments. The instructions on a few lines might trip him up, but he could get zip right along. Until he reached page 2.

On page 2 of the 1040 he would hit a reference to "Form 148" for tax credits. There he would stumble on the biggest change in Iowa's tax law since the last Branstad administration -- the proliferation of targeted tax credits. By my count, the 1999 1040 contained 13 credits of all kinds; the 2010 return shows 36. RVW, CPA would see, among others, a Wind Energy Production Credit, a Soy-Based Transformer Fluid Credit, an E85 Gasoline Promotion Credit, and two Film Tax Credits.

All of this might make him actually look at the instructions, where he would find other new complications that have crept into the Iowa tax law, including special computations in Iowa for taxable social security income. He would also find a whole bunch of items that where Iowa has strayed from the federal rules:

-Educator Expense deduction

-Tuition and Fee deduction

-Itemized Deduction for State Sales / Use Tax Paid

-50% bonus depreciation for property acquired after December 31, 2008 (and 100% -bonus as of 9/9/2010)

-Increased section 179 expensing of $250,000 for tax years beginning in 2009 and 500,000 for 2010 and 2011.

-Increase in the Iowa earned income tax credit for families with three or more children and married taxpayers

-Exclusion of the first $2,400 of unemployment compensation

-Deduction for the one-time registration fee related to the purchase of certain new vehicles

-Tax free treatment of IRA distributions donated to charity

In short, Governor Branstad returns to the same Iowa tax system he left behind 12 years ago, only even more complicated and loophole-ridden. He returns to an Iowa business tax climate rated the sixth-worst out of 50 states by the Tax Foundation -- bad enough that it will still be worse than Illinois even after this week's big honking tax increase.

Our new old Governor has his work cut out for him. He has urged cutting Iowa's highest-in-the-nation corporate tax rate in half, but other than coming out for a repeal of the scandal-ridden film tax credits, he has focused more on property tax issues than income tax issues.

What should he do? If he asked me for a to-do list, I would suggest, in order:

1. Kill the film credits dead dead dead.

2. Swear off and work to repeal economic development tax credits and targeted tax breaks.

3. Change Iowa's "code conformity" legislation so that federal changes would be automatically adopted in Iowa unless a law is passed to decouple. Now decoupling is the default.

4. Push a business-friendly, simple income tax system -- something like the Quick and Dirty Iowa Tax Reform.

Iowa's income tax needs a re-do badly. Nothing in Governor Branstad's history suggests he's likely to make radical changes. One his top aides is a veteran of Iowans for Tax Relief, a powerful group whose at-all-costs commitment to Iowa's deduction for federal taxes has done much to block tax reform. Unfortunately, if Rip goes back to sleep for another four years, he'll probably have no trouble recognizing Iowa's tax system when he stirs.

Tags: Branstad tax policy.Corporate welfare.Economic Development.film credits.harold hill.Iowa tax policy.Tax Climate Index.Tax Foundation.