The Iowa Alternative Maximum Tax Trial Balloon rises again. From O. Kay Henderson, ‘Flat tax’ likely on GOP legislators’ agenda in 2015:
The top Republican in the Iowa House says if Republicans win statehouse majorities in the House and the Senate this November, one item on his wish list for 2015 is a “flat” state income tax. House Speaker Kraig Paulsen, a Republican from Hiawatha, spoke early this morning at a breakfast meeting of central Iowa Republicans.
Paulsen and his fellow House Republicans endorsed a “flat” tax proposal last year, but it was not considered in the Democratically-led Iowa Senate. The proposal would have allowed Iowans to continue filing their income taxes under the current system or choose the alternative of a 4.5 percent flat tax on their income, with no deductions.
I call this an “alternative maximum tax” because taxpayers will compute the tax both ways and pay the smaller number. That contrasts with the alternative minimum tax, where you compute taxes two ways and pay the higher amount. It has the obvious drawback of adding a new layer of complexity to the current baroque Iowa income tax.
The proposal is likely an attempt to enact a lower rate system in a way that doesn’t upset fans of Iowa’s deduction for federal income taxes — particularly the influential Iowans for Tax Relief. Because the deduction would rarely provide a better result than the alt max tax, support for the old system would wither away, maybe.
I’m probably too much of a tax geek to read the politics correctly, but I’m not convinced adding a new computation to the Iowa 1040 will fire up the electorate. I think something like The Tax Update’s Quick and Dirty Iowa Tax Reform Plan would be easier to run on. Eliminate all the crony tax credits and well-intended but futile tax breaks. Get rid of the job-killing, worst-in-the-nation Iowa corporation income tax. Drastically lower rates, increase the standard deduction, and limit the role of the income tax to funding the government. This would get my vote anyway, and it would at least be awkward to argue instead for the current system that sends millions to some of Iowa’s biggest corporations as subsidies on the backs of you, me and small businesses.
I always thought enforcing the tax rules for alimony would be about the easiest job the IRS could have. When you pay alimony, you get an above-the-line deduction, but only if you list the name and social security number of the recipient ex-spouse. Just match the deduction with the income and generate notices when they don’t match.
This information systems problem is apparently too much for the IRS. Peter Reilly reports:
According to the TIGTA report there were 567,887 Forms 1040 for 2010 that had alimony deductions. The total claimed was $10 Billion. When they compared the corresponding returns that should have recorded the income, there were discrepancies on 266,190 returns including 122,870 returns that had no alimony income at all reported. There were nearly 25,000 returns where the income recognized was greater than the deduction claimed which produced a bit of an offset ($75 million). On net, deductions exceeded income by $2.3 billion. In her piece “Alimony Tax Gap is $1.7 Billion” Ashlea Ebeling goes into more details on the report, so I’m going to get a little more into what I see as the big picture here.
While I’ve never been a huge fan of the IRS, over my career I had developed a grudging respect for the organization’s competence and professionalism. That’s been mostly drawn down over the last few years.
Christopher Bergin, A Warning About the IRS That We Should Heed (Tax Analysts Blog):
As I wrote almost a year ago, the IRS is in trouble. Punishing it will do no more good than ignoring what has happened over the last year. The former seems to be the plan of House Republicans; the latter appears to be the White House plan. We need to fix it, and that is harder than either of the above two approaches.
This is correct. Unfortunately, the IRS became a partisan organization in the Tea Party scandal, and it’s proposed 501(c)(4) regulations only make that official. The impasse won’t be broken until the IRS does something to reassure Republican congresscritters. Withdrawing the proposed rules is probably a necessary start.
Lyman Stone, The Facts on Interstate Migration: Part Five (Tax Policy Blog):
On the whole, these high-inward migration states tend to have lower tax burdens. North Carolina and Idaho have periodically had higher than average tax burdens, but most, like Tennessee and Nevada, have consistently low tax burdens. Again, this doesn’t conclusively prove that taxes drive migration, as no doubt other living costs are lower in these states too: but it does suggest that taxes cannot be discounted out of hand.
Jason Dinesen, Glossary of Tax Terms: Asset
TaxGrrrl, Tesla Continues To Roll Out Tax Strategies For Consumers . An auto company with a marketing pitch built around tax credits seems like a bad thing to me.
Stop by Robert D. Flach’s Place for a solid Friday morning Buzz!
Howard Gleckman, Are Multinationals Getting Tired of Waiting for Corporate Tax Reform? (TaxVox). They seem to be taking a do-it-yourself approach more and more.
Tax Justice Blog, States Can Make Tax Systems Fairer By Expanding or Enacting EITC. I think this is wrong, at least the way the earned income tax credit works now. Arnold Kling has a much-more promising proposal that would replace the EITC and other means-tested welfare programs.
Kyle Pomerleau, Flawed Buffett Rule Reintroduced in Senate (Tax Justice Blog). Of course, that’s the only kind.
Cara Griffith, In Search of a Little Guidance (Tax Analysts Blog). “If informal guidance is the only guidance available to practitioners and taxpayers, can they rely on it?”
TaxProf, The IRS Scandal, Day 372. Guess what? It wasn’t just a few rogues in Cincinnati.
News from the Profession. Alleged “Touch It For a Buck” Creeper CPA Got His License Revoked For Felony Creepiness (Going Concern).