Why not true tax reform in Iowa?

The word out of Des Moines is that the Iowa Legislature will make tax reform a priority in its 2018 session.

With Iowa’s Capitol Hill, like the federal one, under Republican control, “reform” means tax cuts.

That effort comes at a time when the needs for primary services like education, law enforcement, the justice system, environmental protection, mental health, basic benefits for the poor and the working poor, and Medicaid are not being met.

There will be attempts to shift the tax burden from income to sales. Because people of modest means spend most of their income, while those with more money spend a smaller proportion on purchases of taxable items and save/invest the rest, such a shift gives the wealthy a break at the expense of the middle and lower-income classes.

There are steps the legislature and the governor could take to help the situation. Whether they’re up to the task remains to be seen.

Mike Lipsman, former manager of tax research at the Iowa Department of Revenue, last summer listed several of those steps in an op-ed in the Des Moines Register. His recommendations would provide more revenue to the state, not less, and would help to make the state’s tax system more fair.

Lipsman’s suggestions fall into two main categories: those directly affecting individuals, and those affecting corporations and businesses.

Among his individual recommendations are the following:

• Eliminate the personal income tax federal tax deduction.

Iowa, Alabama and Louisiana are the only states that allow a deduction for all federal income tax payments. Iowa’s top personal income tax rate is 8.98 percent, the fourth highest in the nation.

But actual collections from that source in Iowa equal only 2.5 percent of personal income, or the 19th highest in the nation.

Eliminating the deduction would let Iowa lower its rates by 20 percent without losing any revenue, Lipsman points out.

• Reinstate the partial taxation of Social Security benefits.

Before 2007, up to 50 percent of Social Security benefits could be taxed as personal income. That tax was phased out by 2014.

Returning the taxable amount on the state tax form could generate as much as $90 million in additional revenue, Lipsman says.

The additional revenue would come from high-income households.

Elderly residents for whom Social Security provides most of their income would not be affected. Individuals with income below $25,000 and married couples filing jointly with family income below $32,000 would not pay any tax on Social Security income. The current system adds inequity to the state’s tax system, Lipsman notes.

With regard to corporations, Lipsman recommends the following:

• Eliminate the corporate income federal tax deduction.

Iowa lets corporations deduct half their federal income tax payments. So does Missouri; only two states, Alabama and Louisiana, allow their corporations full federal tax deductions from their state income tax payments.

Eliminating the deduction would let Iowa reduce its corporate income tax rates by 25 percent without any revenue loss, Lipsman says.

The state’s top corporate rate of 12 percent would come down to nine percent, making Iowa more competitive.

The action would also help smaller, Iowa-based corporations that make most of their sales in the state, and shift some of the tax burden to larger national companies.

• Require corporations to file their Iowa tax returns on a nationwide combined basis.

Forty-six states collect corporation income tax, and 25 of them require combined reporting, including all our border states except Missouri.

Not requiring combined reporting lets regional and national corporations shift their revenues out of Iowa and their costs into the state, Lipsman notes. Iowa-based corporations are therefore put at a disadvantage relative to multi-state firms.

A combined reporting requirement could increase state revenues by $100 million or more, he says.

• Make all internet companies with sales to Iowans collect and remit the state use tax.

Amazon has already agreed to do this.

It’s estimated that Iowa lost more than $180 million in sales and use tax revenues in 2012 to internet sales, and those sales are significantly higher today.

• Change the franchise tax so that regional and national banks pay the tax at a rate comparable to Iowa-based banks.

Large regional and national banks hold more than 40 percent of Iowa bank deposits. The current law places Iowa-based banks at a competitive disadvantage, Lipsman says. The change could increase state revenues by $20 million.

Other changes would also shore up the state treasury, especially in the area of tax credits. But those listed by Lipsman would boost the state’s competitiveness, make the tax system more equitable and boost state revenues.

Seems worth considering, given the current stress on the state’s budget.

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