Governor Terry Branstad says he and his staff are still evaluating the numbers, but he may propose that legislators make a major change in the state’s income tax in 2014. “We have toyed with the idea of looking at some changes in the income tax,” Branstad says. Branstad wants to wait until a panel of financial experts sets its estimate of overall state tax collections later this month and then start drawing up state budget plans that outline alternatives.
“We need to make sure that we have the resources to meet the obligations that we’ve made,” Branstad says. “The property tax relief and the education reform — those are phased in over the next several years and it’s going to require state resources in order to replace property tax and state resources for the teacher leadership legislation that we passed last year.” Branstad envisions a two-track state income tax system that would set up a new “flat or flatter” state income tax or let Iowans file their income taxes under the current system.
“But we have not got a specific proposal developed yet and hopefully by the time we unveil the budget in January we’ll be in a position to make a recommendation,” Branstad says. Iowa’s current income tax system has nine rates, with a top rate of nearly nine percent. “For people that are not familiar with the Iowa tax structure, that just look at some chart and then they see, well, gosh, Iowa is way up there. You know, California, Hawaii and they see Iowa like third or fourth,” Branstad says. “They’re not really looking at the effective rate.”
Iowa’s income tax rates higher when compared to most other states because Iowa offers a deduction that’s offered in only five other states. That deduction allows Iowans to subtract their federal income tax liability from their income before calculating their state income taxes. “We don’t want to erode federal deductability,” Branstad says, “and that’s why we’re saying: ‘Give ‘em the option.’” By giving taxpayers the option to file their income taxes under the current system with that major deduction or under a new system with lower and flatter rates, Branstad might avoid the firestorm he faced from his fellow Republicans in the late 1980s when he proposed doing away with that deduction.
Iowans for Tax Relief, founded and financed by a former Republican legislator, has long opposed getting rid of that deduction. “Our overall goal is to reduce the tax burden and make Iowa more competitive and we want to look at the best way to do that,” Branstad says. “And we want to do that respecting how strongly Iowans feel about having a tax on a tax.” Branstad briefly talked about a “flat or flatter” state income tax during an appearance at the Westside Conservative Breakfast Club in Urbandale, then expanded on the subject during an interview with Radio Iowa and The Des Moines Register.