Tax Update Blog: Eye on the Legislature Archives

I'M SO DISILLUSIONED

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: corporate welfare.iowa tax policy.

Link  • Eye on the Legislature  • Comments (0)       Bookmark: del.icio.us • Digg • reddit

OLDSTERS THRASH WHIPPERSNAPPERS

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.

BREAKS BEGIN TO APPLY IN 2007

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%

TO WHAT END?

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.

Prior Coverage: GIVE US YOUR OLD, YOUR CREAKY, YOUR BINGO PLAYERS...

Link  • Eye on the Legislature ~ • Iowa Tax Law       Bookmark: del.icio.us • Digg • reddit

GOVERNOR SIGNS HOLDING PERIOD BILL

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.

WHO QUALIFIES FOR THE EXCLUSION

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.

Link  • Eye on the Legislature ~ • Iowa Tax Law       Bookmark: del.icio.us • Digg • reddit

IOWA CORPORATE TAXES: A MODEST PROPOSAL

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.

Link  • Eye on the Legislature  • Comments (2)       Bookmark: del.icio.us • Digg • reddit

IOWA SENATE VOTES TO ROLL BACK TAX ON MATH-IMPAIRED

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.)

Link  • Eye on the Legislature       Bookmark: del.icio.us • Digg • reddit

SENATE PASSES IOWA HOLDING PERIOD FIX

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)

Link  • Eye on the Legislature  • Comments (2)       Bookmark: del.icio.us • Digg • reddit

SOON A THE PRICE OF A NEW CAR WILL BE ALL THAT STANDS BETWEEN YOU AND $179.60

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.

Link  • Eye on the Legislature       Bookmark: del.icio.us • Digg • reddit

TAX FOUNDATION: IOWA NINTH WORST STATE FOR BUSINESS TAXES

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 don’t 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.

Link  • Eye on the Legislature ~ • Iowa Tax Law       Bookmark: del.icio.us • Digg • reddit

IOWA HOLDING PERIOD LEGISLATION ADVANCES

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.

Link  • Eye on the Legislature ~ • Iowa Tax Law       Bookmark: del.icio.us • Digg • reddit

REGISTER HAS FRONT PAGER ON IOWA PENSION EXEMPTION

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:

ROLL CALL ON THE PENSION EXEMPTION

GIVE US YOUR OLD, YOUR CREAKY, YOUR BINGO PLAYERS...

THEY'RE BAA-ACK

Link  • Eye on the Legislature  • Comments (2)       Bookmark: del.icio.us • Digg • reddit

ROLL CALL ON THE PENSION EXEMPTION

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.

Link  • Eye on the Legislature       Bookmark: del.icio.us • Digg • reddit

NEW IOWA 'HOLDING PERIOD' PROPOSAL

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.

Link  • Eye on the Legislature ~ • Iowa Tax Law       Bookmark: del.icio.us • Digg • reddit

A $179.60 COUPON FOR A NEW E-85 CAR

January 13, 2006

Clinton 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.

Link  • Eye on the Legislature  • Comments (1)       Bookmark: del.icio.us • Digg • reddit

$13.47 FOR YOUR EXCHANGE STUDENT

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.

Link  • Eye on the Legislature  • Comments (1)       Bookmark: del.icio.us • Digg • reddit

THEY'RE BAA-ACK

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:

TAX-FREE GEEZER BILL

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.

OTHER BILLS IN BRIEF:

•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.

Link  • Eye on the Legislature ~ • Iowa Tax Law  • Comments (2)       Bookmark: del.icio.us • Digg • reddit