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DES MOINES, Iowa – Iowans would have the option of paying a flat 4.5 percent state rate on their 2013 taxable income or using the current system of deducting expenses and federal taxes they pay under a major policy change that got its first legislative nod of approval Tuesday.
Proponents said the alternative would simplify an overly complex state income tax return and likely reduce state revenue as taxpayers opt for the method that costs them the least, while critics argued the flat tax approach primarily would benefit Iowans in the higher income brackets that now pay up to 8.98 percent on their taxable income.
Under the alternative envisioned in House File 3, the 4.5 percent state tax calculation would be made on a taxpayer's adjusted gross income after subtracting a standard deduction of $12,470 for a married couple filing jointly or $6,235 for single filers, a married person who files separately on a joint return, a surviving spouse or a head of household. A taxpayer would not be allowed to take any tax credit for the tax year for which the election is made, except the credits for withheld tax and estimated tax paid under state law.
If approved, the flat-tax alternative would be retroactive to Jan. 1 and apply on state taxes due on April 30, 2014. Iowa's current graduated income tax system has eight rates that top out at 8.98 percent on taxable income exceeding $66,000.
"This has a lot of merit, in my mind," said Rep. John Landon, R-Ankeny, one of 53 majority House Republicans to cosponsor the measure. "I think this would be the simplest and easiest thing that we could do for the taxpayers."
However, Rep. Dan Kelley, D-Newton, said the approach appeared to skew in favor of wealthier Iowans when the state needs to lesser the tax burden on middle- and lower-income taxpayers.
Rep. Chip Baltimore, R-Boone, who led the subcommittee that approved the measure and sent it to the House Ways and Means Committee, said he believed the option would "prove very beneficial for middle-class taxpayers." He also noted that it would simplify a process that is complicated by Iowa being one of only a handful of states that allow taxpayers to deduct their federal tax liability on their state income tax return – a deduction that would be eliminated for those who choose to take advantage of the flat rate option.
David Goodner of Iowa Citizens for Community Improvement Action Fund, said his group opposed to the bill "because we believe a flat tax is a regressive, race-to-the-bottom proposal that overwhelmingly benefits the very rich at the expense of everyday people and hardworking families. Iowa's very wealthy have a responsibility to pay their fair share of taxes, and this proposal does not make them do that. We support fair taxes, not flat taxes, and ask that this bill not move forward."
Connie Ryan-Terrell of the Interfaith Alliance of Iowa Action Fund opposed putting a flat-tax option in the Iowa code for fear it would "be tweaked" in the future to become the basis for taxing income in Iowa.
Victoria Daniels of the Iowa Department of Revenue said her agency would face many "technological hurdles" in accommodating the flat tax option for state income-tax filers within the time line prescribed by the bill, noting that the department would have to develop a new compliance program and make other modifications in the context of limited resources and a 40-year-old operating system.
Sen. Joe Bolkcom, D-Iowa City, chairman of the Senate Ways and Means Committee, said Iowa has a progressive income tax system now and "a flat tax throws that completely out the window." He said there are better ways to improve the system's fairness and complexity that do not involve spinning off another option that would add to taxpayer confusion.
"It has an uphill climb here in the Senate," where Democrats hold a 26-24 majority, he said.