Written by Ed Failor, Jr
Iowa is one of three states which allow individual taxpayers to fully deduct all of the tax payments made to the federal government on state income tax returns. This deduction is called federal deductibility.
The name of this important deduction suggests this is a federal issue. However, it is not. The control of your ability to deduct your federal tax payments lies solely with your State Legislators. Federal deductibility is an Iowa state income tax deduction of federal taxes paid to the IRS.
Iowans for Tax Relief has beaten back numerous attempts by Iowa politicians to take this deduction away from Iowans. We support federal deductibility as a matter of simple fairness – you should not pay a tax on a tax.
Allowing Iowa taxpayers to fully deduct the taxes they pay to the federal government assures Iowans are not paying a state income tax on their federal income tax. The tax system needs to be fair, and no one should be double taxed. No Iowan should be forced to pay income taxes on what they already paid to the IRS as federal income taxes.
Forcing Iowans to pay a tax on a tax is not fair.
Tax deductions help to reduce the state tax burden on Iowa residents. Removing a deduction, specifically the deduction for federal taxes paid, is a tax increase. For some Iowans, federal deductibility is the largest way to reduce their tax burden.
For instance, lower-income and middle-income taxpayers who rent their homes cannot deduct mortgage interest or property taxes, and federal deductibility is the largest deduction these Iowans have on their state income taxes. Federal deductibility helps reduce the state tax burden on lower-income and middle-income Iowans who have few other ways to lower their tax bill.
If you rent your residence, your deduction of federal taxes is likely your largest income tax deduction. For all lower-income and middle-income families, federal deductibility allows them to keep more of their income.
Presently, your right to deduct your federal taxes from your Iowa income is under attack in the Statehouse. Senate Democrat Leaders have publicly stated they are looking at options eliminating federal deductibility; and Governor Culver has expressed his interest in double taxing Iowa taxpayers.
Only last week, when asked about the possibility getting rid of federal deductibility this year, the Governor said, “It’s kind of complicated,” Culver said, with a laugh, “and anything we can do to kind of simplify and streamline the tax code I’m for it. It’s somewhat outdated in the way it’s applied and I think that it might be time to just kind of look and see if we can make ….(the tax code) more straightforward and clear.”
There is nothing more straightforward and clear—ending federal deductibility is a tax increase of six-hundred million dollars and you will be taxed by Iowa politicians on money you never had in your hands. Suggesting a tax increase as a solution to simplify the tax form is an insult to all hard working Iowans.
Some lawmakers will say eliminating federal deductibility is “reform,” however, tax increases are not reform, and ending federal deductibility is a tax increase.
Legislators realize if they increase Iowa’s income tax rates, taxpayers will feel the change nearly instantly. However, they know if they eliminate federal deductibility, your taxable income is increased. It is really quite simple for politicians to increase your taxable income – all they have to do is remove your tax deductions. With one accounting maneuver, you suddenly owe more taxes – even though income tax rates have stayed the same.
Further, nearly three-quarters of Iowans support keeping federal deductibility as part of the Iowa Income Tax Code. In a poll taken in January 2009, 72.5% of Iowans support maintaining their right to deduct federal tax payments.
It is unjust for state government to impose an income tax on money you have been required to pay to the federal government; money you have never touched or spent, saved, or invested.
Ed Failor, Jr. is the President of the Muscatine-based Iowans for Tax Relief. The website for Iowans for Tax Relief is http://www.taxrelief.org.
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