An alternative maximum tax for Iowa?

October 24th, 2012 by Joe Kristan

Governor Branstad yesterday floated a trial balloon for his upcoming tax reform proposals. He suggested a new tax plan that would exist side-by-side with Iowa’s current complex and loophole-ridden mess.  Donnelle Eller reports in today’s Des Moines Register:

Gov. Terry Branstad suggested Tuesday letting Iowa taxpayers decide whether they want to pay a flat tax rate or deduct federal taxes under the existing tax system.

Branstad told business executives who make up the Iowa Partnership for Economic Progress Board that discussions are early and models were being used to determine what the flat tax rate proposal should be.

The plan resembles that of Iowans for Discounted Taxes.  Their web page describes their proposal:

 The legislation needs to offer you the opportunity to file with all your deductions, or with your new “discount” at the rate of only 5.32% on EARNED income. You would pay 0% on your interest income, dividends, pensions, Social Security, and, JUST LIKE BILL CLINTON DID FOR HOMEOWNERS, 0% on all capital gains.

It’s unlikely that the Governor would pursue a plan that exempted investment income, given the likely response telegraphed by Senate Majority Leader Mike Gronstal in the Register article:

 ”Democrats agree that the state treasury can afford tax cuts. We think any tax cuts we do ought to be targeted toward helping growing small businesses and the middle class,” he said.

Of course “targeting” tax benefits is how we got to the horrendous tax system Iowa has now.  Politicians like to “target” tax breaks to their friends and preferred constituencies.  That means they target the wallets of everyone not lucky or well-connected enough to get the breaks.

The Governor’s trial balloon, which I’ll call an Alternative Maximum Tax, has its own problems.  The obvious one is that it would just add one more computation to an already difficult tax return.  Taxpayers would compute their taxes under each system and file whichever return produced the lowest tax.

It would seem to make more sense to just put in one simpler tax system and throw out the old one.  Why is the Governor taking this strange approach?  Possibly as a way to get around the dead-ender opposition to ending the deduction for federal taxes on Iowa’s return, led by the powerful Muscatine advocacy group Iowans for Tax Relief.  If the old mess is left as an option, perhaps a parallel simpler system with lower rates and no federal deduction could pass muster in Muscatine.  Then maybe the old system would eventually wither away.    Somehow, I don’t think the withering would ever happen, and we’d end up with an even worse system.

There’s still time for the Governor to go bold.  The time is now for the Tax Update’s Quick and Dirty Iowa Tax Reform!

Other coverage: Rod Boshart,  Branstad favors giving Iowans choice of tax breaks

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