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Tax Update Blog: Eye on the Legislature Archives

Iowa tax code conformity update sent to Governor

March 06, 2012

The legislature yesterday passed annual tax code maintenance bill, sending HSB 544 to the Governor for signature. Most of Iowa's income tax is based on the federal income tax; the bill updates references to the federal tax code as it stands at January 1, 2012, instead of January 1, 2011.

There were few changes to the federal tax late last year, so this bill is relatively minor. It doesn't change Iowa's non-conformity to federal bonus depreciation. While Iowa taxpayers can take Section 179 deduction on their Iowa returns the same way as on federal returns, Iowans can only take regular MACRS depreciation on their state returns.

In some years the code conformity bill has been controversial. It's a silly exercise; Iowa should automatically adapt federal changes, with the option to vote out specific ones (an option that should rarely be used).

There has been no recent action on the few substantive (using the word loosely) income tax proposals before the legislature. The half-baked Iowa ESOP bill and the misbegotten "Anchor manufacturing" bill appear to be flying virtually unvetted towards passage, making real tax reform that much less likely to ever happen.

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Incentives to stay poor

February 16, 2012

The state legislature seems to be racing to increase Iowa's earned income tax credit as part of an emerging grand bargain to lower commercial property taxes. The Iowa Senate has passed a bill to increase the refundable credit to 20% of the federal credit by 2014. It currently is 7% of the federal credit.

While the legislation may be well-intended, it worsens a perverse side effect of the EITC: it increases the penalty for the working poor to improve their lot. The EITC phases out as income increases. When you take the phase-out into account, the marginal tax rate -- the effective rate on each additional dollar of income earned -- goes through the roof.

Using a standard income tax projection software, I figured the marginal tax rate of a single taxpayer with three children and self-employment income. I used self-employment income to capture the payroll tax effects of additional earnings that are hidden for wage earners. The results are charted below:

Click to enlarge

The federal marginal tax rate reaches 48%. The Iowa marginal rate rises as high as 10.04%. Considering the highest federal and Iowa regular tax rates for high-income earners are 35% and 8.98%, that's a real handicap on the working poor trying to improve their lot. It 's a big unintended incentive to the poor to keep their income low.

The situation gets even worse if you take into account other means-tested welfare benefits. The loss of these benefits can cause marginal tax rates for the working poor to exceed 100%.

It would be nice if the legislature would consider the disincentives they create for emerging from poverty. Unfortunately, giving away money is enough for them to campaign on.

Related: Can you cut taxes for people who don't pay taxes?

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New Iowa ESOP break clears House committee

February 02, 2012

The Governor's proposed new break for ESOPs moved closer to passage yesterday when it cleared the House Ways and Means Committee. Like too many bad bills, it passed unanimously.

The bill, HF 2085, provides an exclusion on sales of stock to Employee Stock Ownership Plans if the corporation owns at least 30% of the company's stock after the transaction.

The key language of the bill:

(1) To the extent not already excluded, the net capital gain from the sale or exchange of employer securities of an Iowa corporation to a qualified Iowa employee stock ownership plan when, upon completion of the transaction, the qualified Iowa employee stock ownership plan owns at least thirty percent of all outstanding employer securities issued by the Iowa corporation.

(2) For purposes of this paragraph:

(a) "Employer securities" means the same as defined in 1 section 409(l) of the Internal Revenue Code.

(b) "Iowa corporation" means a corporation whose commercial 3 domicile, as defined in section 422.32, is in this state.

Even if you think extra state breaks for ESOPs are a great idea (they aren't), this bill is a mess. It meshes badly with Federal Code Section 1042, which provides an elective deferral for sales to ESOPs owning 30% of the corporation stock if the proceeds are re-invested in public securities. The gain is deferred until the public securities are sold.

The way this bill is written, it may make people selling stock to ESOPs choose between a federal deferral of taxable income and a permanent state exclusion. Remember, the Iowa break only applies on a sale of "employer securities." The securities purchased when proceeds are re-invested under Section 1042 are not "employer securities," so the Iowa break will not apply when they are eventually sold. If language excluding the deferred Section 1042 gain is added to the bill (Iowa gain is normally the same as federal), it would require taxpayers taking advantage of the federal break to remember to reduce the gain on the eventual sale of the rollover securities for their Iowa returns.

So why are state ESOP breaks not a good idea? The ESOP rules are incredibly complicated, and for many closely-held S corporations, almost hopelessly so. A state break adds an additional layer of complexity to an already byzantine part of the tax law. It also makes the Iowa tax law even more complicated. It will do about as much good for the Iowa economy as a bill signed yesterday "RELATING TO FINANCIAL ASSISTANCE FOR PURPOSES OF THE BATTLESHIP IOWA."

We shouldn't be adding more small-beer tax breaks to an Iowa tax law already full of them. Like the Battleship Iowa, the Iowa income tax is obsolete. It's time to start over with a simple system with low rates -- something like the Quick and Dirty Iowa Tax Reform plan. Unlike this break, it could actually more than a token difference for the Iowa economy.

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Department of Revenue explains what Branstad didn't veto

July 29, 2011

The Iowa Department of Revenue explains in an e-mail to practitioners the provisions enacted this week when Governor Branstad signed most of SF 533:

Immediate Income Tax Changes for Iowa Taxpayers

Senate File 533 enacted on July 27, 2011 made changes impacting Iowa income tax provisions for tax years 2008, 2010, and 2011.

This legislation retroactively coupled with the following federal provisions for 2008:

• Tuition and Fees Deduction

• Educator Expenses Deduction

• Casualty Loss (10% limit; $100 floor)

Taxpayers who are impacted by these changes and have already filed returns for tax year 2008 may want to consider filing an amended Iowa tax return. Amended returns may be filed within three years of the original due date. No interest will be paid on refunds resulting from this legislation. NOTE: These changes are allowed only for the 2008 tax year. These changes are not allowed for the 2009 tax year since Iowa did not couple with tax changes affecting the 2009 tax year.

For 2010 and 2011 Individual Income Tax Filers Only:

• Taxpayers can make an adjustment on the 2011 tax year return for Iowa’s coupling with the federal Tuition & Fees Deduction and Educator Expenses Deduction for 2010. The taxpayer has the option to amend 2010 or adjust 2011.

For 2010 and 2011 Individual Income Tax Filers, as well as Corporate Income Tax (including S Corporations), Partnership, Fiduciary and Franchise Tax:

• Taxpayers can make an adjustment on the 2011 tax year return for Iowa’s coupling with the federal Section 179 expensing limit for 2010. The taxpayer has the option to amend 2010 or adjust 2011.

The Governor item-vetoed an increase in the Iowa Earned Income Tax Credit included in the bill.

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Governor Branstad item vetoes increase in Iowa earned income tax credit

July 28, 2011

Governor Branstad has vetoed the increase in the Iowa earned income tax credit enacted in the closing hours of Iowa's recently-ended legislative session. SF 533 would have increased the credit to 10% of the federal credit, from the current 7%. The refundable credit would have cost $28.5 million, according to the Governor. No other tax provisions were vetoed. From the veto message:

It is my desire to approach tax policy in a comprehensive and holistic manner. As such, I urge members of the House and Senate to continue to work with my office on an overall tax reduction package that both fits within our sound budgeting principles while reducing those taxes that are impeding our state's ability to compete for new business and jobs.

Comprehensive and holistic? I got your comprehensive and holistic right here.

Related: Legislature allows Iowans to take some 2010 deductions on 2011 returns

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Legislature allows Iowans to take some 2010 deductions on 2011 returns

June 30, 2011

The Iowa Senate yesterday passed a conference committee report to SF 533 allowing Iowans to claim some 2010 Section 179 deductions, Educator Expenses and Tuition Expense deductions on 2011 returns.

This unusual bill is a result of the legislature passing a major tax bill near the end of this year's tax season. SF 512 conformed 2010 Iowa rules to federal rules for these three items after most 2010 Iowa returns had been filed. SF 512 increased the Iowa Section 179 deduction to $500,000, from $134,000, for 2010. It also allowed Iowans to claim the $250 educator expense deduction and the federal tuition deduction for 2010.

The bill allows Iowans to get the benefit of these belated 2010 tax breaks without having to amend returns. This will save people from the absurdity of amending a return to get a $20 refund for teacher expenses. It will also save pass-through entities the need to have all of their owners amend returns to claim the extra Sec. 179 deduction, with the resulting hassle and expense. Taxpayers can still amend 2010 returns if they prefer to.

The Senate also passed the expansion of the earned income tax credit yesterday (SF 533). The Iowa credit rate rises to 10% for 2011.

The initial version of this post erroneously reported that the amended return relief was not in the bill. I apologize for the error.

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Is this the week the legislature will finally go home?

June 27, 2011

This article says the Iowa General Assembly may finally end their ridiculously long 2011 session this week. Whether they will allow taxpayers to claim the 2010 tax benefits they enacted at the end of the filing season on 2011 returns -- rather than having to amend 2010 -- remains up in the air.

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Iowa House approves bill allowing 2010 expenses on 2011 returns; Senate future in doubt

June 09, 2011

The Iowa House of Representatives approved a proposal (HF 697) to allow Iowans to take advantage of 2010 tax breaks that weren't enacted until Apriil 2011 without amending returns. The proposal would give taxpayers the option of claiming their additional Sec. 179 expenses, educator expenses and higher-education deductions for 2010 on their 2011 Iowa returns. Otherwise the taxpayers could only claim the deductions by filing amended 2010 returns.

The proposal was passed as part of a broader budget bill, which puts its future in doubt. The Washington Examiner reports:

Democrats warned that Republicans were wasting their time on the House measure, saying the proposal will have no future in the Democratic Senate.

"This bill is dead as soon as it hits the Senate," said Rep. Bruce Hunter, D-Des Moines.

No progress has been made in bargaining between the House and Senate over a new state budget, though the fiscal year ends on June 30.

Related: Proposal would allow Iowans to claim some 2010 breaks on 2011 returns

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Proposal would allow Iowans to claim some 2010 breaks on 2011 returns

June 08, 2011

The Iowa legislature didn't get around to deciding what Iowa's 2010 income tax law was until April of this year. Thousands of Iowa returns were filed without claiming deductions enacted by the later-than-last-minute legislation (SF 512). Today the Iowa House is scheduled to debate a proposal to allow taxpayers the option of claiming those breaks on their 2011 returns in place of filing amended 2010 returns.

Amendment H-1735 to HF 677 -- the omnibus budget bill -- would allow taxpayers to take the following 2010 tax breaks on 2011 returns:

- The Section 179 deduction of up to $500,000 for otherwise depreciable equipment. The Iowa 2010 limit had been $134,000;

- The deduction for higher education expenses; and

- The $250 educator expense deduction.

This is a great idea. Amending an Iowa return to get a $250 educator deduction is hardly worth the bother of amending when you at best get a $22 refund. An S corporation claiming the increased Section 179 deduction may have multiple owners that have already filed 2010 returns; it may be a better deal to just hold the deduction over to 2011 than to pay to amend the 2010 Iowa return and all of the owner IA 1040s.

The bill also would allow taxpayers to amend their 2008 Iowa returns to claim the same teacher deductions, higher education expenses and the optional itemized sales tax deduction allowed on federal returns for that year. This is a strange provision, re-opening an old year for deductions that taxpayers have given up on. In fact, many taxpayers who accidentally claimed those deductions on Iowa returns for those years because they were on the federal return have paid assessments issued by the Department of Revenue for those items; they would then have to amend their returns to recover refunds for the deductions they claimed in the first place.

There apparently is no budget deal yet, so the passage of these provision can't be assumed. Still, it's good to see legislation that could save the expense of amending returns for small refund amounts.

Related: Iowa late changes: should you amend your returns?

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When to amend Iowa returns?

May 04, 2011

I talk about the possibilty of legislation that would save taxpayers the trouble of amending 2010 Iowa returns to claim the benefits of Iowa's last-minute legislation passed last month in my new post. There apparently is draft legislation circulating to allow taxpayers to take the new 2010 deductions on 2011 returns. I haven't seen it yet, but it looks like there is still plenty of time for the legislature to work on it.

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Missouri advances, Iowa goes backwards

May 03, 2011

After one of Iowa's targeted tax credit programs exploded in scandal, and a blue-ribbon panel reported that there was no evidence that any of the two dozen or so other ones do any good, the Iowa legislature responds with... more tax credits! From

The Iowa Senate voted 48-1 on Monday to boost incentives to promote the use of renewable fuels. Senate File 531, which goes to the House for consideration, would boost the tax credits offered to retail stations that meet the renewable fuel standards established in Iowa in 2006. The legislation approved Monday would provide additional incentives to retailers of 1.5 cents per gallon on top of the schedule already in law for 2012 and beyond, said Sen. Rob Hogg, D-Cedar Rapids, the bill's floor manager. "There is no back-sliding" on the schedule to promote more ethanol and biodiesel sales, he said. The measure also would provide a separate tax credit for 15 percent ethanol-blended fuels, which the industry hopes will replace the current E-10 standard, Hogg said.

Leaving aside the question of whether an ethanol industry is even worth promoting, the idea that it can be advanced just by promoting sales in one state is wacky. But lawmakers like the delightfully-named Mr. Hogg are always ready to give a little more of your money to an industry already awash in taxpayer money.

In Missouri, they seem to be catching on. Tax Analysts reports that the Missouri Senate has approved, 32-2, a major cutback in targeted tax credits ($link):

The legislation would:

* reduce the historic preservation credit from an annual cap of $140 million to $75 million beginning in 2012;
* reduce the state's low-income housing credit, which is now allowed over a 10-year period, to a five-year period;
* prohibit the issuance of 4 percent low-income credits after June 30, 2011;
* limit the total low-income housing tax credits available annually to $80 million; and
* cap the affordable housing assistance credit at $8.5 million instead of its current $10 million per year.

HB 116 would also prohibit the authorization of some credits after August 28, 2014, including the neighborhood preservation tax credit, the family farm breeding livestock tax credit, the agricultural product utilization tax credit, the qualified beef tax credit, and the wine and grape producer tax credit.

The measure would further prevent the authorization of some other credits after August 28, 2015, including the maternity home tax credit, the pregnancy resource center tax credit, the disabled access tax credit, the residential treatment agency tax credit, and the food pantry tax credit.

Finally, the bill would repeal the charcoal producers tax credit, the self-employed health insurance tax credit, the railroad rolling stock tax credit, and the brownfield jobs/investment credit.

And I'm sure that the Missouri charcoal producers are just as good, hard-working folks as Iowa's ethanol producers.

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Iowa's tax season officially ends today

May 02, 2011

While the federal due date was two weeks ago, Iowa's 1040s are due today. Iowa's usual April 30 deadline fell on Saturday, so today is the day.

Iowa automatically extends returns without a separate filing if you have paid 90% of your liability through withholding and estimated tax payments. If you need to pay in to get to the 90%, use the Iowa Individual Tax Payment Voucher, or pay online.

In the spirit of extensions, Iowa's legislature has extended its session beyond its normal adjournment. They are trying to work out a property tax and budget compromise. We're waiting to see if they'll also pass a technical bill to allow Iowans who filed their returns before the state changed the 2010 tax law last month to claim their new benefits on 2011 returns, instead of amended returns. We'll keep you posted.

Our hard-working legislative supergeniuses will no longer get per-diem money for any remaining days in session. I say they should get their whole annual pay on the first day of the session. If they decide to go home on Day 2, it's money well spent.

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Time to amend Iowa returns?

April 29, 2011

If the dollars are small and the costs are big, it may pay to wait to amend for this month's changes in Iowa's 2010 tax law. The ISU Center on Agricultural Law and Taxation explains.

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ISU Ag Law Center rounds up Iowa tax changes

April 25, 2011

All of the recent Iowa tax legislation, including Section 179 and bonus depreciation changes, is rounded up by the ISU Center for Agricultural Law and Taxation.

Related: The morning after the Iowa bonus depreciation veto

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The morning after the Iowa bonus depreciation veto

April 22, 2011

Now that the Governor has vetoed bonus depreciation for Iowa, what happens now?

From the Des Moines Register coverage, it sounds like the Democrats are truly unhappy with the veto message because it also blocks an increase in Iowa's Earned Income Tax Credit:

Rep. Tyler Olson, D-Cedar Rapids, accused Branstad of reckless action that unraveled a carefully crafted compromise. "His insistence on rewarding special interests and big corporations at the expense of small businesses and middle-class families is bad for Iowa and a serious blow to bipartisanship," Olson said.

The Republicans, in contrast, don't sound like they are all that upset:

Iowa House Speaker Kraig Paulsen, R-Hiawatha, said: "I'm pleased the governor signed the Taxpayers Trust Fund, giving Iowa taxpayers a seat at the table. Obviously, I'm disappointed that he chose to veto portions of the bill. House Republicans will continue to fight for tax relief for Iowans."

That doesn't sound like somebody ready to lead a veto override battle, and the Democrats won't be able to override the veto without help.

While tax conformity is always good, Iowa has been non-conforming with bonus depreciation for so long that one more year probably isn't that big of a deal. I do like this part of the veto message:

As earlier indicated, it is my desire to approach tax policy in a comprehensive and holistic manner. As such, I urge members of the House and Senate to continue to work with my office on an overall tax reduction package that both fits within our sound budgeting principles while reducing those taxes that are impeding our state’s ability to compete for new business and jobs.

If the Governor is really willing to deal with Iowa's real tax problem -- a ridiculously complex income tax with absurdly high rates undermined by dozens of special interest deductions and tax credits -- then maybe it's all worth it. Maybe - just maybe - the time is right for real tax reform in Iowa.

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Link: Radio Iowa Coverage

Prior Tax Update coverage:

Bonus depreciation for Iowa -- not so fast?
Conference Committee agrees to bonus depreciation for Iowa for 2011

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Bonus depreciation for Iowa -- not so fast?

April 21, 2011

Update, 4:15 pm: Governor item-vetoes 2011 Iowa bonus depreciation, enhanced earned-income credit. An insider tells me that since he let the "taxpayer relief fund" stand, there probably will not be an override. We'll see.

Nothing seems easy in Iowa tax policy this year. Now it looks like the Governor may veto the bonus depreciation provisions passed Tuesday by the legislature. The Des Moines Register reports:

Iowa Senate Majority Leader Michael Gronstal on Wednesday offered what he described as a compromise to break a stalemate over the state's budget, but it was quickly rejected by Gov. Terry Branstad.

The Republican governor also indicated he may veto portions of a tax relief and supplemental spending bill approved earlier this week by the Iowa Legislature. The situation could be an ominous sign as the House and Senate try to move towards adjournment of their annual session next week.

Governor Branstad appears mostly upset with the bill's setting a budget for only one year at a time. The Governor is trying to reinstate two-year budgeting in Iowa. But bonus depreciation may also be a problem:

"Other issues, involving the taxes, I think are better to be resolved in a bill that deals with taxes, not supplemental appropriations," Branstad said.

Stay tuned.

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Conference Committee agrees to bonus depreciation for Iowa for 2011

April 16, 2011

It looks like Iowa will couple with bonus depreciation for 2011 after all.

The long-dormant conference committee working to reconcile the differing versions of the indigent defense appripriation bill (SF 209), passed over a month ago in each house, finally came to an agreement yesterday. We've confirned through a conference member that, in addition to finally paying the public defenders, the bill links allows federal bonus depreciation on Iowa returns for assets placed in service in 2011.

Just last week the Governor enacted the "code coupling" provisions of SF 512. These provisions had originally been included in SF 209, but were enacted separately when that bill bogged down in conference. SF 512 couples federal law for Iowa with the Internal Revenue Code as of January 1, 2011, except for bonus depreciation; it allows the $500,000 Section 179 limit for 2010 and 2011 assets on Iowa returns.

The conference bill text isn't yet available; we will link to it when it is. It is expected to pass both houses next week.

Related: Iowa Department of Revenue issues release on new Iowa rules enacted yesterday

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Iowa Department of Revenue issues release on new Iowa rules enacted yesterday

April 13, 2011

The Department of Revenue has posted a news release on the tax changes in SF 512 signed into law yesterday:

Deduction of Educator Expenses

Taxpayers who meet the requirements of an eligible educator in 2010, can deduct up to $250 of qualified expenses he or she paid in 2010 and claimed on line 23 of the federal return. This deduction is claimed as an Other Adjustment on line 24 of the IA 1040.

Tuition and Fees Deduction for Higher Education

Taxpayers who paid qualified tuition and fees for themselves, a spouse, or dependent(s) are able to take this deduction as claimed on line 34 of the federal return. This deduction is claimed as an Other Adjustment on line 24 of the IA 1040.

Election to Deduct State Sales/Use Tax as an Itemized Deduction in lieu of State Income Tax

Taxpayers will have the option of claiming an itemized deduction for either other state and local income taxes, or general sales taxes as claimed on the federal Schedule A, line 5. Iowa 1040 Schedule A has been modified to incorporate this change and is available on the Department Web site.

Earned Income Tax Credit (EITC)

The refundable Iowa credit is simply 7% of the federal credit, and there is no longer a need to recalculate the federal credit.

Tax Free Distribution from an IRA to Certain Charities for Individuals 70½ and Older

Taxpayers age 70½ and older can distribute up to $100,000 from their individual retirement account to certain charitable organizations without including the distribution in gross income.

Section 179 Asset Expensing

An increase in the Section 179 expense deduction changes the cap for Iowa taxpayers from $134,000 to $500,000 for tax years beginning in 2010. This phases out when purchases exceed $2,000,000. This brings the limit in line with the federal provisions.

Alternative Simplified Research Credit

Tax form IA 128S immediately replaces the Iowa Alternative Incremental Research Activities Credit, IA 128A, for tax years beginning on or after January 1, 2010. Electronic filing of this form will not be accepted by the Department until April 26, 2011.

Deduction Related to Small Business Health Insurance Credit

For federal tax purposes, taxpayers claiming this credit must reduce the deduction for health insurance premiums by the amount of the credit. Since the deduction is disallowed for federal tax purposes, neither will it be allowed as a deduction for Iowa purposes and no adjustment can be made on the Iowa return.

Start-up Expenditures

Iowa adopts the increase in the amount of start-up expenditures from $5,000 to $10,000 for 2010.

It would be a lot easier if Iowa would just adopt federal changes automatically, with new laws only required to opt out.

Related: Governor uses item veto on SF 512; ties Iowa law to federal tax law for 2010

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Governor uses item veto on SF 512; ties Iowa law to federal tax law for 2010

April 12, 2011

Governor Branstad has used his item veto authority on SF 512, the bill containing the "code conformity" provisions for the Iowa income tax. The item veto removes budget transfer authority included in the bill; the item veto therefore enacts the federal code coupling language.

As a result, we finally have a 2010 Iowa tax law. Key points:

- Iowa conforms to the $500,000 Section 179 deduction limit for 2010 and 2011.
- Iowa adopts federal tax computation rules in effect as of 1/1/2011, including things like the educator expense deduction that have been a problem in other years.
- Iowa DOES NOT adopt federal bonus depreciation for 2010 or 2011.

I don't think the legislature can now undo the parts approved by the Governor in his item veto, but I'll let you know if I hear otherwise. I will update this post as events may warrant.

UPDATE, 5:46 pm: A reader asks in the comments:

So we can deduct front page tuition deduction and educator costs now on 2010 Iowa tax returns? Was it retroactive back to tax year 2008 by any chance?

The SF 512 provisions adopting the Internal Revenue Code changes through 1/1/11 "apply retroactively to January 1, 2010, for tax years beginning on or after that date" (Sec. 6 of the bill). So it goes back to 2010, but not further, if I understand it correctly, and the tuition deduction, the IRA donation exclusion, and the like are good now for Iowa 2010 1040s.

UPDATE, 4/13/2011: Iowa Department of Revenue issues release on new Iowa rules enacted yesterday


SF 512
Veto message

More coverage:

Radio Iowa

Des Moines Register

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So we don't have a 2010 Iowa tax law after all?

April 06, 2011

The bill to set Iowa tax rules for last year for the returns we are filing this month -- and, not incidentally, to pay public defenders who have been unwillingly pro bono since February -- has had a big week. It was amended and passed by the Iowa House last Thursday. The Iowa Senate amended and passed it yesterday, sending it back to the Iowa House, which didn't like what the Senate did, and sent it back. The Senate backed off and passed the House version. So now we can file our returns and the public defenders can get paid, right?

Not so fast. O Kay Henderson reports:

Senate Democrats have accepted a plan from House Republicans for paying the state’s past-due legal bills, but Republican Governor Branstad is still opposed to the idea.

“I was elected to solve a financial mess that was created by bad budgeting practices,” Branstad said Monday.

House Republicans want to give the governor authority to shift state spending from other programs to pay attorneys who’ve been representing clients who can’t afford an attorney and late this afternoon Democrats and Republicans in the Iowa Senate gave up their alternative and decided to go along with that plan. Branstad’s spokesman issued a statement this afternoon, after that Senate action, saying Branstad still believes the proposal would “perpetuate” bad budgeting practices of the past. On Monday, Branstad told reporters there wasn’t extra money in the state budget to shift around anyway.

So now it looks like the Governor will veto the bill. In theory, it seems that shouldn't matter, because the bill passed both houses unanimously, so the veto could be overturned. It's not at all clear that Statehouse Republicans are willing to override a veto by their newly-installed Governor.

What happens then to the tax provisions? As both houses agreed to a coupling of the Section 179 deduction and other tax rules, and agreed to omit bonus depreciation from coupling, the outlines of the ultimate bill seem clear. Yet a bill has to pass, or Iowa's 2010 Section179 limit is $134,000, rather than $500,000. The legislature has not bedazzled with brilliance so far.

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Tax 'coupling' bill at top of Iowa Senate agenda today

April 05, 2011

UPDATE, 11:11 AM The Senate passed SF 512, but after attaching an amendment. It looks like uncontroversial R&D credit stuff, but it still requires another vote in the House. We'll see if they take it up today. I feel good that they will get it done now that both houses have approved pretty much the same thing, but I never trust them.

UPDATE, 1:35 p.m. I was right not to trust them. Apparently the Senate bill had something about "transfer authority," a non-tax provision, that the House didn't like, so they refused to pass the Senate bill as amended. Back to the Senate.

DONE! 4:20 PM The Iowa Senate blinked. They "receded" from their amendment to the version of the bill passed by the House yesterday and passed the House-passed SF512, 49-0. So:

-For years beginning in 2010 and 2011, Iowa adopts $500,000 federal Sec. 179 limit.

-Iowa does not adopt bonus depreciation for 2010 or 2011.

-Iowa conforms with other federal tax changes up through 1/1/2011.

Governor still has to sign, but I'd be shocked if he didn't.

6:00 p.m. OK, maybe I'll be shocked. From O. Kay Henderson: Branstad will likely veto House GOP plan to pay state’s overdue legal bills

Can't anybody play this game?

It looks like our filing season nightmare will end today. The Iowa Senate is scheduled to pick up SF 512, the bill to update Iowa's tax code to federal changes, as its first item of business at 9:00 this morning. We will follow on the Senate Internet feed and update this post for any Senate action.

The bill would couple all Iowa rules to Federal rules for 2010, with the exception of bonus depreciation. Iowa will continue with old fashioned MACRS depreciation for 2010 and 2011. Iowa will adopt the Federal $500,000 Section 179 limit for deducting expenses that would otherwise be capitalized. Absent this bill, the Iowa 2010 Section 179 limit would be $134,000.

It was rumored that the bill would be considered yesterday, but the Senate didn't start its day until 1:00 p.m. and called it a day at 4:19 p.m. But who is in a hurry to want to know what the tax law is for the returns we are preparing for last year, anyway?

Besides, they had important boondoggles to get to. From the Des Moines Register:

The Iowa Senate approved a bill Monday that provides state tax credits for the construction of solar and wind energy systems.

The credits would be equal to 30 percent of the cost of construction or installation, subject to a maximum credit of $15,000 for commercial or agricultural construction or installation or $3,000 for residential construction or installation. The bill specifies that the tax credits will be refundable, or alternatively applied against tax liability for the following tax year, and clarifies that “residential” means a primary or vacation residence, and not a rental property.

Just great. Another refundable credit, another chance to squander millions, another invitation to fraud. Surely after the film credit fiasco, at least some Senators are wising up to this nonsense, right?

The proposal was approved 49-1 with Sen. Mark Chelgren, R-Ottumwa, casting the only negative vote.

I guess not. One doesn't count as "some."


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Whither the Iowa 'coupling' bill? UPDATE: Senate to consider today

April 04, 2011

UPDATE, 1:45 P.M.: Word from the Capitol is that the Iowa Senate will take up SF 512 after they get out of a caucus. We will post when any updates come through. You can follow here.

UPDATE, 4:19 p.m. : After a tough 3 1/3 hour day, our hardworking senators have packed it in until tomorrow without picking up SF 512. Words fail.

After waiting months to do anything about resolving Iowa's 2010 tax law, the Iowa House last Thursday in a single day passed a coupling bill through both the Ways and Means Committee and the House Floor. The bill couples the Iowa tax law to all federal provisions for 2010, with the exception of bonus depreciation. That means Iowa would recognize the new $500,000 limit for Section 179 for 2010 and 2011.

So now that this bill has been separated from the controversial tax reserve fund that had held it up, it should fly through the Senate, right? One would hope, but SF 512 isn't on the Senate calendar for today. Let's hope that's just an oversight. With only two weeks left in filing season, it would be nice to know the Iowa rules.

Related: Iowa can't decide what your 2010 tax rules are, but they can still give it away

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Movement on Iowa 2010 fixed asset rules?

March 31, 2011

I hear that a new "coupling" bill is moving through the Iowa legislature on a fast track as an amendment to SF 512, the indigent defense appropriation. It reportedly has just passed the House Ways and Means Committee. I haven't seen it; I'm told it doesn't couple with bonus depreciation, but it couples to the federal Sec. 179 $500,000 limit for 2010 and 2011. I will update as soon as I learn more.

UPDATE, 5:00 PM: Senate is adjourned until Monday, so no final vote until then, at least. I will try to find out if it's a done deal, but that's my guess now.

UPDATE, 4:40 PM: SF 512, with coupling amendment, passes House, 98-0. This thing must really be on a fast track. Now back to Senate for approval with amendment.

UPDATE, 3:00 PM: Code conformity language. Language does make $500,000 Sec. 179 retroactive to 2010, but doesn't couple for either 2010 or 2011 for bonus depreciation. We'll watch this and update this post for any new developments.

Background here.

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Iowa can't decide what your 2010 tax rules are, but they can still give it away

March 29, 2011

There's no news to report from the Capitol on the impasse over Iowa's fixed asset cost recovery rules for 2010. Last week I was told that if they didn't fix it by last Thursday, it could drag on, and that seems prescient.

While they can't tell us how to do our 2010 Iowa tax returns yet (heck, it's not even April -- why are we so antsy?), they can sure spend it. The Iowa Department of Revenue has released its latest "Tax Credits Contingent Liabilities Report." Some highlights:

- In the last full fiscal year, 23 tax credits awarded by various state agencies added up to almost $182 million.

- For 2008, the last full year for which they have published statistics, Iowa awarded over $81 million in "refundable" tax credits. If you have refundable tax credits in excess of your tax for the year, the state writes you a check for the difference. The only difference between this and straight-up corporate welfare is that no legislative appropriation is needed to collect a refundable tax credit.

- The "Historical Preservation and Cultural and Entertainment District" tax credit has gone through the roof, with awarded credits rising from $15 million in 2009 to $50 million in 2010.

- Just five credits - the Historical credit, the High Quality Jobs Program, the Industrial New Jobs Training Program, and the two Enterprise Zone program credits -- add up to $145 million in 2010. If that has fired up an Iowa economic revival, it's an invisible one.

- When you count all of the tax credit programs, including the economic developments programs, research credits, earned income tax credit, and ethanol and biodiesel promotion, Iowa ran up a $243 million tab in fiscal 2010.

And it doesn't look like it's going to get much better:

Click to enlarge chart.

Rather than running hundreds of millions in futile tax credits through the economic development bureaucracy, Iowa ought to try something different -- let us keep our money and invest it without their help. The Quick and Dirty Iowa Tax Reform Plan is ready to go!

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Iowa legislature fails again to settle 2010 tax depreciation rules

March 25, 2011

Different day, same story. The Iowa General Assembly conference committee trying to reconcile House and Senate bills with differing depreciation rules has now gone two weeks without figuring out what Iowa's tax law is for the returns we are working on now.

Both bills adopt the federal $500,000 Section 179 deduction limit retroactively to 2010. The House Bill adopts federal bonus depreciation for 2010, while the Senate bill adopts it only for 2011. If neither bill passes, the 2010 Iowa Section 179 deduction would be $134,000 and there would be no bonus depreciation on Iowa returns. reports:

The main sticking point in the GOP insistence on creating a tax relief fund that would capture surplus dollars at the end of each fiscal year and earmark them for tax reductions. House Speaker Kraig Paulsen, R-Hiawatha, said legislative Republicans tentative had worked out their agreements but Democrats still were not on board, although he thought negotiators were "very, very close" to finalizing a package. However, Senate Majority Leader Mike Gronstal, D-Council Bluffs, told reporters "I think we’ve made progress but I wouldn’t say it’s close."

If they can't agree on whether they are close, they may not be very close.

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Is today the day Iowa figures out its 2010 tax law?

March 24, 2011

20110324-2.jpgA lobbyist tells me of rumors that the Ieadership of the Iowa General Assembly is "almost there" in settling differences between the House and Senate on Iowa's fixed asset cost recovery rules for 2010 and 2011. Both houses have passed bills allowing the federal Section 179 deduction limit of $500,000 retroactive to 2011. The Iowa House would also allow bonus depreciation for 2010, but the Senate would only allow it for 2011.

If there is an agreement, it is likely to be announced today, as they hate to work on Friday under the Golden Dome. We'll let you know if we hear anything.

UPDATE, 10:50 am: Sen. Majority leader Gronstal wouldn't say conference "is close" to a deal, per Kathie Obradovich's Twitter feed. Boo. Hiss.

UPDATE, 11:22 am: Kathie Obradovich tweets that House Speaker Paulsen says they're "v.v. close." If they can't even agree on how close they are, that may not be a good sign.

Related: Two weeks of conference committee later, we still don't know Iowa's 2010 depreciation rules

Image courtesy of Wikipedia

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Two weeks of conference committee later, we still don't know Iowa's 2010 depreciation rules

March 23, 2011

The conference committee appointed March 8 to reconcile the bills to determine Iowa's 2010 depreciaton rules has gone more than two weeks without figuring things out. Meanwhile thousands of Iowa business returns are either piling up waiting for them, or are being filed knowing that the conference committee might well make the returns retroactively wrong. Attorneys who defend the indigent meanwhile scramble to buy groceries because they aren't getting paid by the state while the impasse lasts.

The decision may have been taken out of the conference committee's hands. This post from O. Kay Henderson implies that the legislative leaders have taken over the process. If they have, they seem to be in no hurry.

That's not to say the legislature isn't doing anything. They're busy trying to make Iowa's tax law worse. The Senate Ways and Means Committee yesterday approved "An Act providing income tax credits for the construction and installation of solar energy systems and wind energy systems, and including effective date and retroactive applicability provisions" Because Iowa's dozens of existing tax credits need company.

There's a better way.

Related: No resolution of Iowa tax impasse

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No resolution of Iowa tax impasse

March 22, 2011

The conference committee charged with resolving the impasse in Iowa's 2010 depreciation rules did nothing yesterday. While negotiations may be going on amount statehouse leaders, no news came out for the thousands of Iowa taxpayers who don't know what depreciation rules to use in preparing their 2010 tax returns.

The Iowa Senate did take a step backwards in tax policy yesterday, but unfortunately it is a backwards step. The Senate passed SF 506, a bill to give a refundable Iowa tax credit equal to 25% off the federal tax credit for businesses with up to 25 employees and an average compensation level of under $50,000. The credit would take effect for 2011.

Refundable credits are bad policy to begin with because they are a temptation to fraud, as our experience with the Earned Income Credit and the Homebuyer Credit illustrate. This credit is also a bad idea because it amounts to the state telling businesses how they should compensate their employees.

But the worst aspect of this complicated credit, from a policy standpoint, is that it imposes a back-door tax on employers who hire more employees or increase employee cash compensation. The credit phases out 1/15 for each new employee you hire starting with your 11th employee, and is gone entirely when you get to 25. The credit also phases out as average compensation exceeds $25,000. That makes the credit function as a tax on new employees and on employee raises -- an idea so obviously bad that it was approved by the Senate on a 48-0 vote.

Link: Des Moines Register coverage.


Iowa to piggyback small employer health credit?

Weekend Update: No resolution yet for 2010 Iowa tax depreciation, Section 179 rules

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Weekend Update: No resolution yet for 2010 Iowa tax depreciation, Section 179 rules

March 19, 2011

The conference committee trying to reconcile the different "tax coupling" bills passed by the two houses of the Iowa General Assembly has now gone a full week without finishing its work.

Meanwhile, thousands of Iowa business tax returns are in limbo, awaiting the word on what rules apply for 2010. The House bill conforms Iowa's tax law for bonus depreciation and the Section 179 deduction to the federal rules effective for 2010. The Senate bill adopts federal Section 179 rules for 2010, but bonus depreciation for 2011.

Many business returns already filed could be affected by the conference decision; these returns might have to be amended to comply with any retroactive tax law changes.

The bills in conference also include "supplemental appropriations" for several state programs, including indigent defense. Attorneys for paupers are scrambling to pay their bills; prosecutors, in contrast, won't miss a paycheck.

The hangup is a proposed bookkeeping account to hold any surplus state funds after the end of the budget year. Republicans want the account to get all surplus funds after reserve funds are restored, to be used for general tax reduction. Democrats want a limited effective date, with only 25% of the surplus to be set aside, and only for property tax relief.

The Governor entered the debate yesterday. In a town hall meeting in Columbus Junction, he came out for splitting the non-contentious issues from the bill so they can be enacted without more delay, reports Kathie Obradovich:

Branstad today, at a town hall meeting to promote his jobs plan, came down on the side of Democrats who want to push through the $45.7 million needed for human services, corrections and indigent defense.

“Since the House and Senate can’t agree on those other things, let’s just pass the things that are essential for now,” Branstad said. “So we can pay the indigent defense bills. So that we can meet the obligations of the people who are in the corrections system and the mental-health institutes. And then work out the other issues where philosophically we have these big differences, before the end of the session.”

This is another example of the Republican House acting independently of the Republican Governor. Earlier the House passed a 20% across-the-board individual rate cut. They haven't acted on the Governor's proposal to halve Iowa's highest-in-the-nation tax rate and increase the tax on casinos.

Rep. Tom Sands, the House Ways and Means Committee chairman, was in the audience. He said after the meeting that House Republicans feel they’ve already conceded on some issues that were important to them. He said supporters of the Taxpayers First Fund will lose leverage if they allow it to be separated from efforts to fill budget holes.

“We feel at this time we should not give on the Taxpayers First Act, because this is something we campaigned on,” he said. “I understand the urgency of getting some of that other stuff passed, but all of it is important.”

Branstad said he understands that, but he added: “I have the most leverage of anybody, because I have the veto.

What happens now? A lobbyist yesterday told me that if the conference fails to reach a deal this coming Monday, the impasse may continue indefinitely. The lobbyist said the most likely resolution on the tax deals is coupling with Section 179, but not bonus depreciation, and the Section 179 coupling may not be retroactive. If it is not, the Section 179 deduction -- which allows businesses to deduct currently fixed asset costs that would otherwise have to be capitalized and depreciated -- would be limited to $134,000 on 2010 Iowa returns. The federal limit for 2010 is $500,000.

Bonus depreciation allows taxpayers to accelerate deductions for new property placed in service in 2010 -- 50% of the cost, plus the normal depreciation, for property put in service before September 9, and 100% of the cost for property placed in service after that date. Failure to conform would leave Iowa businesses under the old regular rules for tax depreciation.

If they would just embrace the Tax Update's Quick and Dirty Tax Reform Plan, they would never have to have this silly debate.


Conference committee makes little progress on Iowa bonus depreciation bill

On the federal rules:

500K Section 179, extended bonus depreciation enacted

Bush-rate extension passes; what it means

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Conference on 2010 depreciation rules for Iowa drags on

March 18, 2011

The conference committee attempting to determine whether to conform Iowa to federal rules for fixed asset cost recovery failed to reach agreement again yesterday. The committee is hung up on a plan to put any leftover money at the end of the fiscal year into a "tax relief fund." Rod Boshart reports:

Talks stalled when House Republicans insisted on creating a tax relief fund with 100 percent of the state’s yearly ending balance flowing into the account, while Senate Democrats wanted to move ahead with $45.7 million in supplemental spending needs and tax “coupling” provisions that would conform Iowa tax laws with federal changes but hold back the tax relief fund to allow for more discussion.

Rep. Scott Raecker, R-Urbandale, a committee co-chairman, said he did not believe the panel was approaching an impasse but he added “we’ve probably made less progress today than we’ve made in other days. At least it’s still continuing the conversation.”

On Wednesday, legislative Democrats agreed to accept a GOP call for creating a special fund designed to capture surplus state dollars for tax relief. However, they significantly restricted the amount of excess revenue that would flow into the account - from 100 percent to 25 percent - insisted the tax relief be earmarked solely for property tax reductions and would start the fund effective in fiscal 2014 rather than next year.

You know, guys, it would sure be nice to be able to finish 2010 returns.

The conference is attempting to resolve the House-approved "tax coupling" bill, which would conform Iowa's Section 179 deduction and bonus depreciation rules to federal rules for 2010, with the Senate bill, which would allow bonus depreciation only starting in 2011. If no bill passes, Iowa will have a $134,000 Section 179 limit for 2010, vs. the federal $500,000 limit on deductions for fixed asset costs that are otherwise capitalized and depreciated over a period of years.

Related: Returns held hostage by conference committee, day 4

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Returns held hostage by conference committee, day 4

March 17, 2011

The third meeting of the conference committee to determine Iowa's depreciation rules for last year broke up without agreement yesterday. They plan to get together again today.

The Iowa House of Representatives passed a bill that would adopt the federal bonus depreciation rules and Section 179 rules for 2010. The Iowa Senate passed a bill that would adopt Section 179 for 2010, but put off bonus depreciation on Iowa returns until 2011. That means we still don't know what rules will apply to recover the cost of fixed assets on Iowa returns that we are trying to prepare now.

Why the hang-up? The sticking point is a special fund to earmark budget savings for tax relief. Rod Boshart reports:

Under the Democratic offer, the Legislature would create a new tax relief fund to receive 25 percent of excess money in the state’s economic emergency fund once the state’s separate cash reserve funds are full. Excess revenues that flowed into that account would be used to provide property tax relief as determined by the General Assembly, said Bolkcom, a conference committee co-chairman and leader of the Senate Ways and Means Committee.

GOP legislators have pushed for a special fund that would capture 100 percent of surplus revenue in the general fund’s ending balance each fiscal year that would be returned to taxpayers. For the current fiscal year, projections call for more than $300 million to be unencumbered by June 30.

It's just bookkeeping screwing up the filing season, then. Surely you think this would be easy enough to work out. That means you just don't appreciate nuance. Conference committee member Scott Raeker:

“We’re really getting into some of the nuances of this right now. But at least on the bigger picture items I believe we’re in alignment and we can work this out is my opinion.

Fine. They've already honked up accrual-basis federal corporation returns that were due Tuesday, where the deduction for state taxes accrued couldn't be determined because state law was up in the air. Maybe the legislature can get this figured out before the April 15 1040 deadline, anyway.

But the legislature is dealing with important stuff. Why just the other day a House Committee approved SF 130. What does that bill do?

This bill allows a resident of this state who is under 16 years of age to accompany the minor’s parent or guardian, or any other competent adult with the consent of the minor’s parent or guardian, while that person is hunting raccoons without obtaining a fur harvester license so long as the minor does not hunt or carry a firearm or weapon of any kind.

Glad they're focused like a laser on the big picture.

Related: Conference committee 'nears compromise,' but no deal yet on Iowa's 2010 tax rules

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Conference committee 'nears compromise,' but no deal yet on Iowa's 2010 tax rules

March 16, 2011

The conference committee trying to reconcile the 2010 coupling bill passed by the two houses of the Iowa legislature failed to close the deal yesterday. They are meeting again this morning. Rod Boshart reports:

Sen. Joe Bolkcom, D-Iowa City, said he was pleased the House was receptive to the Senate approach to conform the state tax code to federal changes -- which would provide $152 million in tax relief but would not implement most changes retroactively for the 2010 tax year as Republicans had proposed.

I understand that the current offer would couple Iowa's law with the federal law's $500,000 Section 179 deduction limit would be retroactive to 2010, but bonus depreciation would not apply for Iowa tax purposes until 2011. The Section 179 deduction enables taxpayers to immediately deduct expenses that would otherwise be capitalized and deducted over multiple years through depreciation or amortization.

The remaining issues apparently are non-tax related:

[House Republican negotiator Scott] Raecker countered that providing an extra $20 million in state funding for mental-health service but setting a deadline to revamp the current system would help spur legislative action, noting that "without the repeal, I don't think you get people to the table to get something done." He also said Republicans were insisting on the tax relief fund as a way to "put the taxpayer at the table" whenever lawmakers make state budget decisions.

The federal 2010 corporation return deadline has come and gone, and we still don't know what Iowa's tax rules are for last year. Get on the stick, guys.

Related: The Tax Update's Quick and Dirty Iowa Tax Reform

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Iowa to piggyback small employer health credit?

March 15, 2011

The Senate Ways and Means Committee yesterday was considering SF248, a bill to match the federal small employer health care credit with an additional Iowa credit starting in 2011.

The federal credit is a horrendously complicated piece of work that phases out as you get more than 10 employees, or as their average compensation exceeds $25,000. The bill would match it with a credit equal to 25% of the credit. The flowchart below illustrates it:

Click to enlarge

It sounds like a nice gesture, but it really amounts to the government telling employers where and how they should compensate their employees, while punishing employers who add to their work force or give their employees raises. Iowa would do better to use whatever revenue would be lost to this to just cut tax rates.

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Conference committee makes little progress on Iowa bonus depreciation bill

March 11, 2011

The Des Moines Register reports that the legislators trying to reconcile the separate bills passed by the houses of the Iowa General Assembly are so far too busy preening to tell us what the tax law is for the returns we are trying to prepare right now:

House Republicans said they don't want that tax break in the bill they're trying to reach a compromise over, saying it should be part of a larger discussion about a 20 percent income tax cut for all Iowans...

Gronstal pointed out that thousands of low-income working Iowans don't have any state income tax liability and instead get money back — so it's false that they would benefit more from the 20 percent cut.

"An across-the-board cut of zero tax gets them nothing. And it shocks me they're that stupid," he said, referring to House Republicans.

That must be more of this "new civility" we keep hearing about.

"Stupid?" House Majority Leader Linda Upmeyer said during a separate meeting with reporters later.

"Is just one of us stupid or are all 60 of us stupid?"

Actually, as we still don't know what Iowa's tax laws are for 2010 2-1/2 months into 2011, taxpayers could be forgiven for thinking it's all 150 of you, in both parties.

Both bills would retroactively boost the maximum 2010 Iowa Section 179 deduction from $134,000 to $500,000 for equipment that would otherwise have to be depreciated. The House bill would adopt the federal bonus depreciation rules starting in 2010; the Senate would adopt them only for 2011.

It's this sort of thing that helps Iowa get its poor rating in the 2010 Small Business Survival Index. More evidence that we need the Tax Update's Quick and Dirty Iowa Tax Reform.

More coverage at

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Iowa 'coupling' bill goes to conference

March 09, 2011 reports that the members of the committee to work out the differences between the "code coupling" legislation passed by the two houses of the Iowa General Assembly have been named:

House conferees are Democratic Reps. Dave Jacoby of Coralville, Tyler Olson of Cedar Rapids and Republican Reps. Nick Wagner of Marion, Scott Raecker of Urbandale and Erik Helland of Johnston.

Senate conferees are Democratic Sens. Joe Bolkcom of Iowa City, Pam Jochum of Dubuque and Bob Dvorsky of Coralville, and Republican Sens. Brad Zaun of Urbandale and Steve Kettering of Lake View.

The bill would allow the full federal $500,000 Section 179 deduction retroactive to 2010; absent the legislation, Iowa's limit will be $134,000. The bills also enact "bonus" depreciation for Iowa; the House of Representatives ties Iowa's rules to the federal bonus depreciation rules starting in 2010; the Senate has a 2011 effective date.

This, of course, affects thousands of returns in process or already filed. It's long past time for Iowa to couple automatically with federal changes and legislate differences. This practice of having to update to the federal tax code every year is expensive and disruptive for taxpayers and preparers.

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Iowa Senate refuses to concur on bill that would enact bonus depreciation for 2010

March 08, 2011

With the federal corporation return due date a week away and taxpayers clamoring for their K-1s, tax preparers still don't know what depreciation rules to use on 2010 Iowa returns. We'll be in the dark a little longer. On a party-line vote, the Iowa Senate refused to go along with the Iowa House tax code update bill yesterday.

The bills will now go to a conference committee to iron out differences. The House bill would make bonus depreciation available for 2010; the Senate bill only allows it starting in 2011. Both bills would couple with the federal $500,000 section 179 limit for 2010.

A lobbyist tells me that the different bonus depreciation dates aren't the hangup. The House bill has a less generous earned-income credit than the Senate bill, and that seems to be the problem. I just hope all of these legislators have big Iowa refunds that their failure to act will continue to delay.

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2010 Bonus Depreciation bill passes Iowa House

March 02, 2011

The Iowa House of Representatives last night voted to allow bonus depreciation and $500,000 of Section 179 depreciation on Iowa tax returns effective for 2010.

The Senate-passed version of S. 209 increases the Iowa Section 179 limit to $500,000 effective for 2010, but only allows bonus depreciation starting in 2011. It's not clear which bonus depreciation effective date will emerge when the two houses reconcile their versions of the bill.

This is a quandary for businesses wanting to get their 2010 returns filed. As I wrote at yesterday, it may be wise to wait a little longer before filing Iowa returns when you have bonus depreciation or over $134,000 in Section 179 deductions on your federal filings.

Many taxpayers have already filed for 2010. The House-Senate conference should add a provision to S. 209 to allow any taxpayers who have already filed under the old rules to continue to depreciate their 2010 assets that way so they don't have to amend their already-filed 2010 returns.

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Iowa House Ways and Means passes coupling with $500K 2010 Section 179 limit AND bonus depreciation

February 22, 2011

The Iowa House Ways and Means Committee has given Iowa businesses another reason to take their time finishing their 2010 returns. Rod Boshart reports at Eastern Iowa

The House Ways and Means Committee voted 17-7 to “couple” Iowa tax law with the federal tax code to allow small businesses to make equipment purchases and use tax advantages to generate economic activity and job growth. Unlike the Senate, however, they made the bonus depreciation provisions effective for the 2010 tax year to provide immediate benefits rather than delaying their implementation in the 2011 tax year as senators proposed.

The Senate "coupling" bill made the $500,000 Section 179 limitation effective for 2010; without coupling, Iowa taxpayers could only use Sec. 179 for up to $134,000 in 2010. Section 179 allows a current deduction for assets that would otherwise be capitalized and expensed over a period of years via depreciation deductions.

By allowing taxpayers to use the "bonus depreciation" provisions for 2010, the House Ways and Means version of SF 209 would allow taxpayers to write off 50% (100% for post-9/8/2010 purchases) of the cost of more new business assets. As bonus depreciation has fewer limits that Section 179, and can generate net operating losses, this would make a big difference in 2010 tax returns currently being prepared.


Coupling bill passes Iowa Senate with $500,000 2010 Sec. 179 deduction

Bonus Depreciation and Farm Buildings

Bush-rate extension passes; what it means

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Coupling bill passes Iowa Senate with $500,000 2010 Sec. 179 deduction

February 18, 2011

You might want to not file your Iowa business returns for 2010 quite yet.

The Iowa Senate yesterday passed its bill (SF 209) to update Iowa tax law for recent federal tax changes. The bill retroactively couples for 2010, and forward for 2011, for the $500,000 Sec. 179 deduction enacted last September. That is important for Iowa filers who are taking advantage of the increased Sec. 179 deduction on their 2010 returns; they may also be able to take it on their Iowa returns.

In contrast, the bill couples with the federal bonus depreciation rules only starting in January 2011.

The bill is not enacted yet, and Iowa's coupling deduction has been a mess for the past few years. As it hasn't passed, the 2010 Sec. 179 limit for Iowa officially is still $134,000. If you have to file now -- say, because you are a farmer trying to meet a March 1 deadline -- that's the number to use on your Iowa return. If you can wait, though, you might as well, to avoid having to amend your returns if the coupling legislation passes.

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Will Iowa's legislature take another shot at the deduction for federal taxes?

January 28, 2010

While Governor Culver's proposed budget doesn't propose to repeal Iowa's deduction for federal taxes paid, a key legislator has quietly put that issue back in play, reports

Although legislative leaders repeatedly have said they don’t foresee action on a plan advanced last year to eliminate a provision of Iowa tax code that allows Iowans to deduct their federal income tax payment when calculating their Iowa tax liability, House Ways and Means Committee Chairman Paul Shomshor, D-Council Bluffs, re-assigned the bill to a subcommittee Wednesday.

“We’re willing to take a look at any type of tax issue that moves Iowa forward,” Shomshor said.

The Democratic legislative leadership failed to force the bill through last year. It seems unlikely that anything has changed to make it any easier to pass this year, but hope springs eternal for tax-hikers.

The Governor does call for a $52.5 million haircut - about 10% - to Iowa's corporate welfare bill. Governor Culver remains committed to corporate welfare:

The governor said he would work with the Legislature to figure out how to save $52 million in revenues from tax credit programs. He did not say whether he favored getting rid of controversial incentives for film-makers or other less-in-demand incentives pinpointed for elimination by a panel of state agency representatives.

However, he recommends keeping credits for newer or still-struggling industries, Biodiesel Blended Fuel Tax Credit, E85 Gasoline Promotion Tax Credit, Ethanol Promotion Tax Credit, Renewable Energy Tax Credit, and the Wind Energy Production Tax Credit.

Because if the federal 50-cent to $1 per gallon biodiesel subsidy isn't enough to get these "struggling" businesses over the top, the state needs to throw even more money at them.

The whole concept of corporate welfare tax credits is discredited, except to politicians and those who cash in on the credits. Real economic growth occurs outside the corporate welfare system. The only way to motivate that sort of growth is to lower the rates and broaden the tax base -- something like the Tax Update Quick and Dirty Iowa Tax Reform. Instead, we'll see more haggling over who gets the welfare, and how much.

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Will Iowa re-couple with federal deductions?

January 25, 2010

The article says the issue of linking Iowa's income tax rules to the latest federal legislation is "complicated," but it's really pretty simple:

“We’re going through some really tough decisions in state government and additional things that cost big piles of money aren’t likely to happen,” said Senate Majority Leader Mike Gronstal, D-Council Bluffs.

In other words, the legislature is loath to give up any of your money, and it's just tough that it makes a mess of your tax return.

This year the Department of Revenue telling taxpayers to assume that Iowa won't couple to federal changes. Last year the Department made the mistake of assuming the Legislature would get it together, causing many taxpayers to file botched returns.

Some of the provisions that will require different numbers on federal and Iowa returns, absent coupling legislation:

- Bonus depreciation is not allowed for Iowa.
- The Iowa Section 179 deduction will be limited to $133,000; the federal limit is $250,000.
- Iowa won't allow the $250 "educator" deduction.
- College tuition deductions won't be available on the Iowa return.
- The optional sales tax deduction will not be available on Iowa returns.

The newly-enacted retroactive 2009 deduction for contributions made in 2010 for Haiti disaster relief will also be unavailable in Iowa unless the legislature acts.

Prediction: Iowa will at most couple with a few of the little items -- maybe including Haiti relief -- and none of the big ones, like depreciation or Section 179.

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May 12, 2008

Al Sharpton, a tax cheat? I thought he was a man of the people. More here. How could I be more disillusioned?

Well, maybe if I found out that the statewide 1-cent sales tax increase enacted last month by the Iowa legislature wasn't really passed just to help the children:

City officials could redirect money collected from local-option sales taxes without the public's vote under a last-minute amendment added to a state budget bill in the final hours of this year's legislative session.

It means that special 1-cent sales taxes that voters have approved in hundreds of Iowa cities for such things as road and sewer improvements could instead be used to give tax breaks to developers or in numerous other ways.

The new sales tax replaces county-by-county local option sales taxes. The county taxes had to be renewed every ten years by referendum, and the politicians just hated that. They argued for the new statewide tax on the grounds that the money was needed for education. Some naifs believed them. Or said they did.

"This bill allows cities to use a bait-and-switch on their citizens," Michael King, president of the Iowa State Association of Counties, wrote in a May 2 letter to Gov. Chet Culver.

Under the revision, public officials could change the use of the tax collection as long as it's used to help pay for an urban renewal project. Such renewal areas are generally locations that city and state officials have designated as slums or blighted, making them eligible for property tax breaks known as tax increment financing.

Yet the next time a sales tax or bond referendum goes down in flames, the elected officials will be just astounded that they aren't trusted.

State 29 has more.

Tags: ..

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May 03, 2006

The Iowa General Assembly scored one for age and cunning yesterday. They the old folks tax exemption that was part of last week's budget agreement between Governor Vilsack and legislative leaders. The bill passed the Senate 46-4 and the House 89-6.

Youth and ability struck out in last year's session, when a bill to exempt youth from Iowa taxes died without a floor vote.


The old folks bill has two parts: a large exemption for all income, and an additional exemption for social security income.

Starting in 2007, the blanket exemption excuses taxpayers who are 65 or older from income tax if their "net income" is $24,000 ($18,000 for single filers). The exemptions increase to $32,000 for married filers, surviving spouses and heads of household in 2009, and $24,000 for single filers.

"Net income" is roughly equivalent to federal adjusted gross income, except it is reduced by the the Iowa capital gain deduction, the deduction for college savings Iowa contributions, and the additional Iowa health insurance deduction.

The bill also phases out the taxation of social security retirement income in Iowa.

Current law: In computing federal taxes, 50% of social secuirty benefits are taxable if income exceeds $32,000 ($25,000 for single filers and heads of household), and 85% are taxable if income exceeds $44,000 ($32,000 for singles and households). Iowa doesn't tax the 85% portion.

New rules: Iowa will phase out its tax on social security benefits over eight years. The amount now subject to tax will be reduced by the percentages below:

          2007     32%
          2008     32%
          2009     43%
          2010     55%
          2011     67%
          2012     77%
          2013     89%
          2014    100%


Supporters of the bill say that it will help keep retirees from leaving Iowa. Iowa's population today is the fourth-oldest in the country. By 2030, Iowa is projected to have 227,000 more people over 65 than it does now, and 246,000 fewer people between 18 and 44. Keeping old folks seems like the least of Iowa's problems.

Senator Mary Lundby says that many Iowa seniors struggle with their bills. That is certainly true. So do many younger Iowans. There are plenty of Iowans aged 18-54 who are struggling to feed their families, make mortgage or rent payments, keep the car going, pay for health insurance, and buy $2.90 gasoline. Statistically, these younger Iowans are all likely to have a lower net worth than the beneficiaries of these new tax breaks. The census bureau says that in 2000, median net worth of households under age 35 was about 6.65% of that of households 65 and up. So if you want to help struggling Iowans, a tax break based only on age is misdirected; while there are poor old Iowans, the old folks are less likely to be poor than the kids.

But we have an election coming up, and old folks tend to be reliable voters, so here we are. My hat's off to the four senators and six representatives who didn't vote to stick it to the rest of us.


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March 31, 2006

Governor Vilsack on Wednesday signed into law the bill (H.F. 2465) on the "holding period" rules for Iowa's capital gain exclusion. The bill applies federal tax law holding period rules in determining whether property has been "held" the necessary 10 years to qualify for the Iowa capital gains breaks.

This bill overrides a risible Department of Revenue position on holding periods effective for capital gains on sales starting January 1, 2006. It's unclear whether the bill will have any effect on pending disputes with the department.


The exclusion applies in several different circumstances, including:

1. Capital gains on the sale by an individual or pass-through entity of substantially all of the assets of a business held at least 10 years, if the taxpayer "materially participated" in the business for at least 10 years.

2. The sale of real estate held for at least ten years out used in a business in which the taxpayer materially participated for 10 years.

3. Gain to a shareholder on the liquidation of a corporation in which the taxpayer meets the 10-year holding and participation requirements.

"Material participation" is determined using the federal standards from the "passive activity" rules. They are summarized in the extended entry below.

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March 27, 2006

The Iowa Revenue Estimating Conference last week issued its latest guess at fiscal-year 2006 state revenues. It's worth looking at just to see where the state gets its money. Of Iowa's $5.23 billion in FY 2005 tax revenue, the corporate income tax contributed only $280.9 million - about 5.4%. Individual income tax receipts were $2.78 billion for the same period.

The proposal to exempt the pension income of seniors from Iowa tax is slated to reduce tax receipts around $200 million annually. Like so many bad ideas, this transparent pandering to a big voting bloc is touted as "economic development."

If they're serious about economic development, here's an idea: repeal the corporate income tax. If they want to make up the lost revenue, they can repeal all of the state's economic development credits at the same time.

The economic development benefits of repealing the corporate tax are obvious. If you are trying to make Iowa attractive to businesses, what's a better pitch:

A. "No corporate income tax?," or

B. "Tax-free living for old folks."

I think "A" sells better, myself.

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March 14, 2006

It was a busy day for the Iowa Senate yesterday. Not only did they fix the state's super-duper-long-term capital gain deduction holding period rule and select a state fish, they voted to remove the state-run slot machines video lottery installations. The roll call is here.

UPDATE: Don't miss this fly-on-the-wall account of yesterday's Touchplay debate.

Speaking of math-impaired, here is a hilarious list of measurements of the internal revenue code by our elected officials. My favorite, from Rep. Nick Smith of Michigan:

"the federal tax code has about four times as many words as the bible. Accompanying the law are a staggering two-and-a-half million pages of regulations"

I never knew you could fit 2.5 million pages in five paperback volumes that take up less than a foot of shelf space. Must be the fine print...

Of course it's funny, but not so much when you realize we elect these people. Is it just to get them to go away? (Hat tip: The Tax Prof.)

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March 13, 2006

The Iowa State Senate today unanimously approved HF 2465 to conform Iowa's "holding period" rules to the federal tax law. The Iowa House has already approved the bill, so now it goes to the Governor.

The bill is a reaction to the Department of Revenue's "master tax guide" rule for determining holding periods. The legislature apparently prefers something that makes sense.

In other important news, the Iowa Senate voted to make the Channel Cat the official state fish. I hope that doesn't make it a protected species or something.

The noble Iowa State Fish (proposed)

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March 08, 2006

If a bill that passed the Iowa House yesterday ends up as law, Iowans will be able to claim a $2,000 deduction when they buy a vehicle that qualifies for the federal clean fuel vehicle tax credit.

The provision is in the "code conformity" bill that the legislature passes annually to update the state tax law for federal changes. For cars bought before 2006, the federal tax law provided clean fuel deduction. The federal deduction was replaced by a credit for 2006; Iowa's change would allow Iowans to continue to take the deduction on their state returns.

A "credit" reduces taxes dollar-for-dollar; a $2,000 credit would reduce your tax bill by $2,000. A deduction, in contrast, reduces your income on which the tax is computed; a $2,000 deduction would save $179.60 for a taxpayer at Iowa's top 8.98% tax rate.

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February 28, 2006

The Tax Foundation has issued its annual ranking of state business tax climates (summarized here). Iowa, unsurprisingly, is one of the worst - worse even than California, if you can imagine that.

Source: Tax Foundation. Click graphic for larger view.

How'd we do it?

Generally the index rewards tax codes that are neutral; that is, they have low, flat tax rates that apply to everyone. This makes tax law simpler and more transparent and avoids double taxation.

The worst state tax codes tend to have:

complex, multi-rate corporate and individual income taxes;
above-average sales tax rates that dont exempt business-to-business purchases;
complex, high-rate unemployment tax systems; and
high effective property tax rates, as well as a host of other wealth-based taxes.

Iowa leads the way to the bottom in the first category with its highest-in-the-nation 12% corporate rate. We have very complex individual and corporate systems riddled with special-interest incentives and credits. So what is the legislature doing about it? Trying to get down to number 50, as far as I can tell. Some examples:

- A bill (HF 2045) has passed the Iowa House to exempt pension and social security income from tax. This creates a favored group of taxpayers, adds complexity to the code, and requires higher rates from taxpayers outside the favored group.

- A bill (HF 2052) would allow a deduction for cars that burn E-85 fuel.

- HF 2261 would create an " Individual income tax deduction for dentists who receive state medical assistance reimbursement less than their normal fee."

- HF 2274 would provide an "Individual and corporate income tax credit for purchase and installation of methane gas conversion property by livestock producers to be used to generate electricity."

What these all have in common is that they give a small group of taxpayers a break - which means everyone not benefitting pays more. And there are lots more bills like that in the hopper. While carving up a raft of new tax breaks to buy votes, the legislature is ignoring the dire need to lower rates and get rid of the rat's nest of exemptions, credits and special favors that makes our tax law business-hostile.

Look out, No. 50 New York, we're coming at you.

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February 27, 2006

The Iowa Senate Ways and Means Committee has passed a bill (S 2093) to make Iowa's "holding period" rules the same as federal rules. The rules are used to determine whether taxpayers meet the requirements to exclude capital gains on certain property held for longer than 10 years.

The Iowa House is considering similar legislation.

While it is good that the legislature is working to override the Department of Revenue's indefensible position on this, I wish the bill explanation asserted that they think that's what the law already is - or at least that the bill shouldn't affect any current controversies before the Department.

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February 06, 2006

The Des Moines Register leads today with a skeptical piece on the pension exemption passed last week by the Iowa house. The piece features interviews with seniors, most of them opposed to or ambivalent about the proposal to exempt all pension and Social Security income from Iowa tax.

The proposal passed the Iowa House 81-18, with all Republicans and a majority of Democrats voting in favor.

The article says that pension taxes aren't always decisive for retirees leaving the state. It presents a nice map showing nationwide retiree migration patterns. The map caption summarizes the point of the article:

There are few retirees leaving Iowa near the state's border, which experts say counters the argument that "border birds" are settling in South Dakota and Illinois to avoid Iowa taxes. The elderly population tends to migrate toward the suburban fringes of metropolitan regions or to areas with warm temperatures, lakes or mountains.

I would say that retiree taxes are a factor, but usually not a decisive one. A lot more Iowans move to Arizona, which has income taxes, than to tax-free South Dakota. When retirees do leave for tax reasons, it's usually because they have large amounts of investment income; the House proposal won't affect them.

The main reason to oppose this tax, I feel, is that it further narrows the tax base. Somebody has to pay the taxes, and if the retirees pay less, everyone else pays more. It narrows the base and requires higher rates on those who remain. It also will make sensible comprehensive state tax reform that much harder to achieve because the old folks won't want to give up their tax break.

The best quote from the article:

"Which problem should Iowa be focusing on: losing young people or losing the elderly? . . . I think possibly we have our full quota of older Iowans," says Mary Jane Odell, 82, of Des Moines and a registered Republican.

Worst argument for the pension break:

Taxing retirement benefits is unfair because it's a double taxation.

No, taxing pensions is not double taxation. By definition, pension income was excluded from income during your working life. Any tax on the pensions at retirement is on amounts long tax-deferred.

Least coherent argument for the tax break (from Rep. Jamie Van Fossen):

"Not only is it the right thing to do, it's the fair thing to do," he said. "This helps cops and firefighters and health care workers and people who have invested in their 401(k)s. To me it adds up to good policy."

Huh? "Cops and firefighers and health care workers?" Why not "the children," and kittens too? It sure doesn't help the cops and firefighters and health care workers who are still working; it means they have to pay higher taxes. It sure doesn't help the people who are still investing in their 401(k) plans; the higher state taxes they have to pay will squeeze their ability to save more in the retirement plans. The only good policy about it is that it panders to a segment of the population that votes in large numbers, at the expense of everyone else.

Prior coverage:




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February 01, 2006

The Iowa House yesterday passed the proposal to exempt all pension income from Iowa taxation. The bill to saddle everybody but pensioners with higher taxes passed 81-18. The roll call is below.


And another milestone is reached in Iowa's attempt to shuffle past Florida for the coveted "oldest population" prize.

Prior coverage here and here.

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January 27, 2006

A new bill in the Iowa Senate, SSB 3046, would require Iowa to follow federal tax rules in determining how long an asset has been "held."

This is important for taxpayers trying to qualify for the Iowa exclusion for capital gains on business property that has been "held" for at least ten years. The Department of Revenue has made up its own holding period rules based on a chain of reasoning stemming from (I'm not making this up) a misreading of an old CCH "Master Tax Guide."

The bill would apply for determining the holding period of property sold starting January 1, 2006 and retroactively to tax years ending after January 1, 2006.

There are many policy reasons against this capital gain exclusion in the first place, but if it is to exist, it should at least be easy to apply. Under the current Department of Revenue interpretation, like-kind exchanges and involuntary conversions of business property start a new holding period; under federal law, the holding period of teheexchanged property (or converted property) "tacks" to the property acquired to replace it. Taxpayers shouldn't have to deal with a separate unclear set of holding period rules based on the whim of state tax collectors.

While the proposed rules are fine as far as they go, they should be expanded to cover all open tax years. The Department's application of the rules up to now is wrong, and SSB 3046 should say so. The 2006 effective date is likely to embolden the Department to continue to defend its old holding period stance for examinations of pre-2006 tax years. At the very least, the explanation of the bill should say that the provision is a "clarification" of existing rules.

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January 13, 2006

243.jpgClinton Republican Steven Olson proposes to allow a $2,000 Iowa-only tax deduction for purchases of new non-business cars that use E-85 fuel.

What basic rules of good tax policy does this bill (HF 2052) violate?

- It makes taxpayers do a different computation on the federal return than the Iowa return, making life harder.

- It's not obviously computer-enforceable, so it would require an examination to determine if somebody is lying.

- It tries to make the tax law do something that it shouldn't do - make people buy E-85.

Maybe the maximum tax savings of $179.60 will help compensate the owners for the extra fuel they will burn looking for a gas station that carries E-85.

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January 12, 2006

The federal tax law lets you take a $50 charitable deduction for each month that you have an exchange student in your home. SF 2003 proposes to boost this to $200 for Iowa returns.

Leaving aside the questionable wisdom of a federal charitable deduction for this (it's a nice gesture, I suppose, but who really is doing this expecting a deduction?), what is the point of making the rule different for Iowa? At the top 8.98% individual rate, this would be $13.47 per month. Most teenagers consume that in milk alone. Nobody is going to adjust their bahavior because of this law, with the exception of tax software companies.

This is a classic example of a proposal that makes for a more complicated tax law with trivial compensating benefits. Iowa should avoid making its computations different from the federal rules in almost all cases.

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January 11, 2006

Yes, the Iowa legislature is back in session. That means we will see any number of proposals floated to buy votes and influence by mucking up Iowa's tax law.

We'll start a new feature here where where we will try to track Iowa tax propoposals. We may not cover them all, as there are 150 legislators and one me. But here goes:


The first big income tax proposal would phase out income taxes on all pension and social security income (HSB 502). Last year they wanted to exempt young folks. Make up your minds!

This bill is pure pandering. As much as we cherish our older Iowans, they are statistically our wealthiest folks. They didn't pay taxes on their pensions while they worked, and now they aren't to pay taxes on them as retirees? Remember, giving the old folks this break by definition means a tax increase for the rest of us. The boomers are getting ready to stick it to us once again!

Or is the goal economic development: to make Iowa the next Sun City by attracting old folks here? Maybe that's what they can use that Rainforest thingy for.

In any case, the House Ways and Means Committee has already voted this thing to the floor. Bad news travels fast.

UPDATE FROM THE COMMENTS: Another tax provision to drive out those unruly youngsters.


Exempting the sale of certain school supplies from the sales and use taxes during a specified time (HF 2001). There is no possible policy justification for a holiday. Either these things should be taxed, or not. Go here for a more detailed discussion, if you're interested.

Increasing the taxes imposed on cigarettes and tobacco products and providing for deposit of the increased revenue generated in the Senior Living Trust Fund (HF 2022). Tobacco: the revenue wonder weed. Perhaps they shouldn't raid the trust fund in the first place.

The Legislature is developing a nasty nicotine habit. All these tobacco tax increases are going to bite the legislature if people come to their senses and stop smoking. Well, they can always put cigarette vending machines next to the video lottery terminals.

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