Tuesday, March 31, 2009

Debating Ending Federal Income Tax Deductabilty

The House held a public hearing tonight on rather to end the federal income tax deductability. I have been able to follow the happenings through Twitter.

Speaker Murphy had to clear the public from the House Chambers. Republicans are crying out that the taxpayers were kicked out while Democrats tried to push through a tax increase. I am sure Democrats have a different story.

Here's Radio Iowa's version...

A crowd of perhaps 600 Iowans was ordered out of the Iowa House tonight. It happened during a public hearing on a tax bill Democrats are advancing. The crowd was booted for failing to abide by the rules of the House which prohibit "demonstrations of any type from the gallery." (Those words in quotation in the previous sentence are posted on a sign located at the door that leads to the seating areas which overlook the House floor.) Many in the crowd booed and hissed at those who did not share their opinion. They applauded and cheered those who agreed with their point of view.

Iowans for Tax Relief president Ed Failor, Junior, seemed to get the largest burst of applause and cheers from the crowd. Later, Failor accused House Speaker Pat Murphy (D-Dubuque) -- the leader who ordered the crowd out -- of being "a Nazi."
The Democrats plan by ending the ability to deduct your federal income taxes they would be able to lower the tax rates and give the middle class a tax cut. The information I got at a legislative forum on Saturday was that if you make less than $127,00 then you would get a tax cut. The plan was endorsed on Sunday by the Des Moines Register and the Cedar Rapids Gazette.

The most interesting Twitter comment came from Rep. Chris Hagenow (R-Windsor Heights)...
Ed Failor Jr. gave a tremendous speech on respecting the Iowans that built our communities and the future contributors to our state.
To translate what Failor means... we should be respecting the Iowans that
have money and who do everything in the community.

Currently, lower-income non-elderly households in Iowa pay a much greater share of their meager incomes in state and local taxes than high-income families pay according to the Iowa Policy Project (pdf). By ending the ability to deduct federal income tax, it would make the share each tax bracket pays more even and low income Iowans would no longer have to carry the load.

**Update at 10:20**
I watched the local news to see what spin they would put on this and it was surprisingly good. The antics allowed the news to share the facts. If you make less than $127,000 you get a couple hundred dollar tax cut. If you makes between $127,000 and $250,000 then you pay a few hundred dollars more. If you make more than $250,000 then you would pay just above $2,000 more.

**Update at 10:35**
John Deeth calls the out roar at the Statehouse a "Gucci riot."
...the Legislative service Bureau notes:
The income tax reform plan proposed by legislators would reduce average taxes for Iowans earning below $125,000 — but would be revenue neutral for the state because it would increase taxes for those earning above that level.
Revenue neutral. So calling the elimination of federal deductibility a "tax increase' is disingenuous. It's an increase for those more able to pay, and a decrease for people who need the help. Which, of course, is exactly why Republicans are so vehement.


Ben said...

I'm in favor of ending federal tax deductablity on personal income taxes over $125,000. My problem stems from the current state of the bill which does not exempt small business (S-corps, LLC, partnerships, or sole proprietor ships). Ending federal tax deductability for small business would be a major hardship given the current economic situation.

The Jimador said...

It looks like your concern for the brain drain in Iowa is over. This proposal is flawed in so many ways. I prefer to call it, flawed socialism. This is redistribution of wealth but unfortunately young professionals and college graduates get hosed. Most fresh out of college graduates, don't have children, don't own their home and make under what the democrats call rich, $125k. Therefore they will not see a tax cut from eliminating the federal deductibility, they'll see a tax increase.

To make matters worse, there is no incentive for these recent grads to make $125+ in this state because they will be punished with a tax increase. Flawed socialism at its finest = a larger brain drain problem than what we already have.

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noneed4thneed said...

The plan would cut tax rates. You are saying a young professional would not have as many deductions, but they would still be paying a lower tax rate.

Anonymous said...

you have no idea what you are talking about. the plan does not cut tax rates! it eliminates the ability to deduct our federal taxes from our iowa taxes. that is a tax increase!!!

then it redistributes the wealth which is socialism, NOT FREEDOM

why do we want to penalize people who make $125k a year? and those who don't make that much, why work hard to give your children a better life than you, when in the better life you get penalized? wouldn't it be nice if more people could make $125k+? but with this plan, it deters people to work hard, make money and provide more for their families. thats not freedom.

noneed4thneed said...

There are 2 parts of the plan. First it would end the ability to deduct your federal income tax. Second, that money would then go into cutting tax rates. Overall the plan is revenue neutral.

From today's Register (which I blogged about)...

"For most, however, the change would not mean an increase in total tax bills. To account for the federal deduction, Iowa simply raised state rates. Which is why eliminating federal deductibility has been a goal of members of both political parties for many years: Compensating for deductibility has meant Iowa's income-tax rates look out of whack compared to other states. (Only two other states, Alabama and Louisiana, allow 100 percent deductibility.) By eliminating the deduction, Iowa can bring its rates down to be more in line with other states"