If Iowa’s income tax were a car, it would look like this.
The Iowa General Assembly nears the end of its annual rampage. While it finally did something to improve a bad commercial property tax system, it managed to make an already awful income tax a little worse.
The Iowa Senate cleared a property tax plan (SF 295) yesterday to reduce commercial property assessments by 10%, with additional property tax credits for smaller businesses. Unfortunately, the price was to more than double Iowa’s version of the fraud-plagued Earned Income Tax Credit and, it appears, to clutter up the 1040 with additional petty tax credits — those these provisions are apparently part of a separate bill.
As if that weren’t enough abuse to the income tax, the Senate also increased Iowa’s tax credit corporate welfare budget by $50 million (HF 620) by increasing the amount of tax credits that the economic development bureacracy can hand out. They sweetened the corporate welfare pot by enabling the diversion of employee withholding to local crony capitalist slush funds economic development funds.
Another bill, HF 625, increased the popular school tuition credit, a poor substitute for true school choice.
While the politicians will pat themselves vigorously on the back, the net result isn’t very exciting. Yes, lower rates for commercial property are needed. But now Iowa’s dysfunctional income tax is larded with even more corrupt special interest favors, which will make it that much harder to ever enact a system that makes sense for taxpayers without lobbyists and connections.
Our average combined rate of 39.1 percent is the highest in the industrialized world. In an increasingly globalized world, this matters more today than it did the last time we reformed the code in 1986. Today the U.S. has to compete with countries around the globe who are constantly improving their tax codes. When the U.S. fails to do so itself, American consumers, workers, and shareholders lose out.
Politicians created the current corporate tax system and the current system is broken. If you are going to set out a menu of options for corporations to reduce their tax burden, don’t be surprised or upset that corporations take advantage of them.
It’s too bad that the cost of a sensible property tax is a big increase in a program that is a poverty trap for honest taxpayers and a pinata for thieves. The phase-outs of the EITC result in shockingly-high marginal tax rates on each additional dollar earned by relatively low-income taxpayers.
The EITC is refundable, which means it is really a welfare program run through tax returns. About 25% of the EITC is claimed “improperly,” which is a nice way to say it’s stolen. The annual cost of the Iowa EITC boost is estimated at $35 million, so the price of fixing a broken commercial property tax regime is an $8 million annual thief subsidy. So while the politicians celebrate their great compromise, Iowa’s petty thieves also have occasion to raise a glass, filled by you.
It is unlikely that Republicans will find Paul’s smoking gun, but the IRS scandal is almost certainly the result of political bias on some level. It is hard to believe that a group of officials would innocently pick terms like “Tea Party,” “patriot,” and “9/12” to single out organizations for additional scrutiny. It would be incredible to find such disinterested tone-deafness even in the most politically insulated of civil servants (and the IRS is far from insulated).
I doubt the White House left fingerprints on IRS efforts to harass political opponents (though it didn’t lift a finger to stop it). That leads to an even more depressing possibility: that the IRS went out its way to beat up on the President’s opponents on its own. Nobody blew the whistle. That means IRS management is so corrupt and political that it would go after the administration’s political opponents with only a wink and a nudge. And anybody who doesn’t think this was politically-motivated is kidding themselves.
And the IRS scandal was a subversion of democracy on a massive scale. The most fearsome and coercive arm of the administrative state embarked on a systematic effort to suppress citizen dissent against the party in power. Thomas Friedman is famous for musing that he wishes America could be China for a day. It turns out we’ve been China for a while.
Iowa House approves two new bumper stickers for this car.
The Iowa House of Representatives advanced two corporate welfare provisions yesterday.
SF 433makes it easier for businesses with “pilot projects” to keep employee withholding under a “target jobs withholding tax credit” program. It never says what exactly the “pilot projects” are supposed to prove — maybe if you divert employee withholding to the employer, they like that? This additional clutter to Iowa’s already byzantine tax law passed 97-2, opposed only by Bruce Hunter (D., Des Moines), and Charles Isenhart (D., Dubuque).
Legislation aimed at helping some Iowa border communities compete with neighboring states is on its way to the governor.
The targeted jobs program allows qualifying businesses to apply for state withholding tax credits if they plan to relocate or expand in Iowa, provided they are creating or retaining jobs.
“Creating or retaining” jobs? Doesn’t that happen whenever you hire someone? If you want Iowa to “compete” with neighboring states, make the whole tax law competitive. It’s not just border cities who suffer from a bottom-tier business tax climate.
SF 436expands the amount of Historic Rehab Credits available, increasing the distortion of property markets by subsidy, generally for the benefit of the well-connected developers who know how to play the game. This one passed 97-2, with only Rep. Hunter and Rick Olson (D., Polk) voting no.
As for actual good policy — simplifying the law, lowering rates, and doing something for people without lobbyists — nothing. The closest thing to it this session, the flat Alternative Maximum Tax (HF 478), is dying in the Senate. So once again it looks like the legislature will go home having only added more barnacles to the Iowa income tax.
The politicians are tripping all over themselves to claim credit for Facebook’s new server farm in Altoona. From The Des Moines Register:
The Iowa Economic Development Authority board today approved $18 million in tax credits for Facebook’s $300 million data center in Altoona.
“Welcome, Facebook,” said board member Pete Brownell. The data center project has been referred to as Siculus Inc. in state documents.
Debi Durham, the state’s economic development director, said she expected that Facebook’s investment would grow to a billion dollars within five or six years.
“It’s good to be friends with Facebook,” she said. Gov. Terry Branstad said Facebook is “about as high-profile a company as it gets.”
The “high profile” bit tells you why politicians love “targeted” tax credits. It gives them an excuse to call a press conference and cut a ribbon, claiming credit for the project like a rooster taking credit for the sunrise. It’s more fun than facing the fact that real economic growth doesn’t come from photo ops. It doesn’t come from paying $580,000 to a wealthy company for each “job” it brings.
Ultimately economic growth comes from making Iowa an attractive place for low-glamor businesses to set up and expand without having to hire lobbyists and tax consultants to tap the corporate welfare keg. It comes from incremental hiring and location decisions that involve no politicians. It calls for discarding high-profile corporate welfare in favor of a simple low-rate system that’s friendly even for obscure businesses — like The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.
To put things into perspective: our firm, Roth & Company, has “created” more jobs, at higher pay rates, than Facebook’s 31 promised jobs. Where’s our $18 million?
Iowa Senate Republicans advance income tax plan. TheGazette.com reports:
Sen. Randy Feenstra, R-Hull, said all 24 minority Senate Republicans have signed onto a proposal to significantly lower state personal income tax rates and simplify the Iowa tax code by offering a two-pronged approach that would eliminate federal deductibility and benefit most Iowans.
…
The Hull Republican said the proposed new tax structure would flatten the current nine income tax brackets into three, elimination of federal deductibility as a competitive impediment, enhance the current standard deduction for all taxpayers and provide an extra boost for blind, elderly and dependent Iowans, eliminate itemized deduction, increase personal exemption credits, and raise filing thresholds.
So far I have been unable to find the bill (though it being April 11, I’m not going to spend a lot of time looking for it today). As Senate Republicans have no chance of advancing a bill in the face of majority Democratic opposition, it’s really a gesture. Still, it’s nice to see that income tax reform remains alive, in spite of the Governor’s indifference this year. It’s also nice to see that the insistence on keeping the deduction for federal taxes is eroding. Much better to build it into a lower rate.
This is a bit weird given that President Obama rides on what is essentially the nicest corporate jet in the world. To be fair, the President is quite right that companies do not need a tax break to buy corporate jets. But since they don’t really get a tax break for buying corporate jets, we probably don’t need to spend this much valuable presidential time worrying about this non-problem.
Anything to make life difficult for a high-tech U.S. manufacturer. As long as the President continues to beat dead horses like this and the “Buffett Rule,” we know he is not at all serious.
Sure, Democrats pay lip-service to infrastructure, education, and the like. But for the most part, they are profoundly unwilling to make a wholistic case for activist, progressive government.
Actually, they probably wouldn’t get very far making the case honestly.
I will fight for the right to tax you to subsidize other people. Governor Branstad is touchy about criticism of the massive tax breaks for the Southeast Iowa Orascom fertilizer plant. Radio Iowa reports:
“I’m here to make it clear that the chief executive of this state is on your side and we will fight for these jobs and I want to make it clear that when we make a promise to Lee County — or to any county in Iowa for that matter — it’s a promise we’re going to keep, no matter what they might say in Des Moines in any committee meeting,”
Never mind the high possibility that the plant would have been built without our tax money. Never mind the moral problem of taxing existing businesses and taxpayers to lure and subsidize outsiders. Never mind that political allocations of investment capital are always and everywhere unwise. Forget the lost opportunities for taxpayers to spend the money on their own projects. Jobs!
The Governor also hinted at darker forces opposing the tax credits, reports KCCI.com:
And he said he believed the Koch brothers were behind some opposition to the plant because it would hurt their fertilizer business.
So Iowa Democrats opposing the subsidies are tools of the libertarian Koch brothers. Who knew?
David Brunori, Things to Read, Sites to Visit. (Tax.com). He shares some online resources, but tragically fails to mention the Tax Update.
Peter Reilly, No Fans Of Sister Wives At The IRS ? As far as I’m concerned, the possibility of consolidated individual returns should be all the argument needed against polygamy.
Iowa’s top state personal income tax rate is 8.98 percent, compared to 13.3 percent in California. Probably not enough of an improvement to lure millionaires from Pacific Palisades to Dubuque. By contrast, Texas offers zero percent.
Earlier this year, Branstad said he would no longer pursue getting rid of Iowa’s corporate and personal income taxes. Instead, he’s going to focus on cutting property taxes.
Well, California’s property taxes already are fairly low thanks to Proposition 13. Although property prices here are triple those in Iowa and most other states because of our severe restrictions on building.
Bottom line: Iowa doesn’t offer enough incentives to attract many businesses and people to leave California. The Hawkeye State is the Golden State with bad weather.
Ouch. Well, Iowa’s solvent, too, unlike California, which is a fiscal disaster. We also have short commutes. Still, he makes a valid point: it’s not enough to compete with a basket case like California. Golden State refugees have plenty of places to choose from, many of which have better taxes, better weather, or both. I have no thoughts on fixing the weather, but The Quick and Dirty Iowa Tax Reform Planwould take care of the tax problems. With no corporate tax and a 4% individual rate, combined with good employees, education and quality of life, we’d see some Californians.
“Even though on the surface you’re looking at 35% versus 39.6%, it’s a deceptive comparison,” says Robert W. Wood, a tax lawyer with Wood LLP in San Francisco. “There may be a slight short-term advantage in C-Corporations, but there are a number of negative long-term implications that would outweigh short-term benefit.”
For example, C-Corporation profits can be double-taxed. In addition to the corporate tax on profits, owners also would owe personal taxes on any money they take out of the company as dividends. The double tax kicks in when a business is sold, too.
Another potential problem is that a firm that switches from an S-Corporation generally has to remain a C-Corporation for at least five years.
At current rates, a switch to C corporation format is probably still unwise, if tempting, because of the double tax issue. You might have lower tax up front, but getting the money out involves either paying a second tax on the dividends or expensive tax gymnastics, often involving renting to a corporation or potentially “excessive” compensation. C corporations are the Roach Motels of the tax world: they’re a lot easier to check into than check out of. But if there is a significant reduction in corporation rates, the current tax savings will be enough to tip the balance for many taxpayers to C corporation status, double tax or no.
The tax code, as most everyone knows and acknowledges, is ridiculously complex and getting more complex all the time.
When will the complexity cause the system to collapse? And what, exactly, will collapse?
I think it would require a combination of things to “collapse” the tax law. If the perception becomes widespread that it is impossible to comply with the tax law without unreasonable effort, or the rates get intolerably high, and technical advances allow for cash transfers and banking that the government can’t trace, then the game is over.
Tax Analysts is having a conference today on whether, after 100 years, the income tax has run its race.
For the working poor, the EITC is unabashedly a welfare program. For the corporate recipients, the credit is touted as “economic development.” I’m sure EITC recipients feel the same way about their government checks.
The report shows that about $34.2 million of the $50.5 million claimed in research credits was refunded — about 2/3. The biggest recipient of the credit was Rockwell Collins, which received $13.8 million in credits. The report doesn’t say how much credit was refunded for each large recipient; If 2/3 of the Rockwell Collins credits were refunded, that means Iowa taxpayers gave the company $9.2 million
I don’t believe Rockwell Collins, or anyone else, should pay Iowa corporation income tax. It is a bad tax whose repeal would make life better for Iowans. But that’s a long way from saying that taxpayers should actually cut annual welfare checks to corporations doing business in Iowa. While I don’t blame them for taking the checks — who turns down free money? – don’t try to tell me that it’s good for me.
Repeal of giveaways like the refundable research credit and the “economic development” credits given to the big fertilizer companies would go a long way towards paying for repeal of the corporation income tax for businesses lacking the lobbyists and wire-pullers needed to hit the corporate welfare jackpot. Maybe some day we’ll demand the legislature replace the tax-some, pay-others Iowa tax system with something better, like The Quick and Dirty Iowa Tax Reform Plan.
Dislike. The left-wing high-tax advocacy group Citizens for Tax Justice is scandalized that Facebook isn’t paying income taxes on its 2012 income (via the TaxProf):
Earlier this month, the Facebook Inc. released its first “10-K” annual financial report since going public last year. Hidden in the report’s footnotes is an amazing admission: despite $1.1 billion in U.S. profits in 2012, Facebook did not pay even a dime in federal and state income taxes.
Instead, Facebook says it will receive net tax refunds totaling $429 million. Facebook’s income tax refunds stem from the company’s use of a single tax break, the tax deductibility of executive stock options. That tax break reduced Facebook’s federal and state income taxes by $1,033 million in 2012, including refunds of earlier years’ taxes of $451 million.
So why are “executive stock options” deductible? Because they are taxable to the recipients as W-2 income. They are reported as taxable income on the executives 1040s at the same 35% top rate that the corporation pays. In other words, CTJ is upset because the executives, rather than the corporation, write the checks to the IRS.
There is no actual tax reduction. In fact, the government actually gets more income from the options than if Facebook had not issued the options and just paid 35% tax. Because they are also subject to the 2.9% medicare tax (3.8% starting in 2013), the option exercises actually generate additional revenue for the IRS. Presumably CTJ would want the executives to pay tax with no deduction on the other side. That seems unjust.
Kay Bell, Sign up now to pay your federal tax bill via EFTPS. With the ongoing disintegration of the postal service, it’s good to have a secure and sure way to get your taxes paid on time. I’m signed up.
Our new Marriage Bonus and Penalty calculator, despite all its Valentine’s Day finery, ignores the new 0.9 percent Medicare payroll tax hike buried in the 2010 health law. The extra levy affects only a few high-income couples but in very different ways. Lucky couples will collect marriage bonuses of up to $450. But those less fortunate—if anyone making $250,000 can be considered less fortunate—will incur marriage penalties of as much as $1,350 in additional Medicare tax.
Just another example of the whimsical and poorly-conceived nature of the Obamacare Net Investment Income tax.
The last three governors of Illinois all went to prison (and it’s equal opportunity corruption: both Republicans and Democrats). Joining them will be former Congressman Jesse Jackson, Jr. and his wife, Sandi (a former Alderman in Chicago).
Mr. Jackson resigned last November from Congress; Ms. Jackson resigned in January from the Chicago City Council. Both are pleading guilty: Mr. Jackson to conspiracy and Ms. Jackson to filing a false tax return. They pleaded guilty on Friday.
The scheme apparently had them using “business” credit cards (here, business is their re-election campaign) for personal expenses. As this blog has highlighted numerous times in the past (and will likely do numerous times in the future), you can’t put personal expenses on a business return. And we’re not talking nickel and dime purchases; the total is $582,772.58. Add in filing false campaign reports and you have problems.
When people complain about the need to turn power over to government instead of ”greedy corporations,” there is an implied assertion that the government and its operatives are somehow less vulnerable to avarice and self-dealing. Against all evidence.
Governor Branstad has signed the bill conforming Iowa’s tax law to federal changes enacted last month. The Governor signed SF 106 yesterday afternoon.
The bill allows taxpayers to use several federal provisions in computing their 2012 Iowa taxes, including:
- The federal Section 179 deduction of up to $500,000.
- The federal above-the-line deductions for tuition and educator expenses.
- The exclusion for IRA distributions to charity for taxpayers who have reached age 70 1/2, and the transitional rules for January 2013 charitable rollovers of IRA distributions.
- The optional deduction for state and local sales taxes.
The bill does not conform Iowa to federal bonus depreciation; Iowa filers will normally use federal standard MACRS depreciation instead.
Tony Nitti, Senate Proposal for Tax Reform Part II: Democrats Seek To End S Corporation Payroll Tax Loophole. It’s similar to nonsensical proposals put forward in prior years to tax S corporation K-1 income when 75% or more of revenues are “attributable” to three or fewer shareholders — an impossible standard to evaluate in many cases, and one that discriminates against the smallest S corporations. It shows they are lazy — the problems with the approach are well known, yet the won’t make the effort to correct, instead trotting out the same old bill. It just shows they aren’t serious.
David Cay Johnston finds the cuts to IRS funding that would result from the impending sequester “Particularly Devastating” (Tax.com)
In 2012, the IRS says its investigations and in-house filtering systems prevented $20 billion in would-be fraudulent refunds, up from $14 billion the year before. But [Acting IRS Commissioner] Miller acknowledged that thieves still get away with stealing numerous tax refunds, although the IRS could not provide exact loss figures.
“In terms of how much got past us, we’re quite sure some did,” Miller told reporters in a conference call. “I know it doesn’t approach the number that we stopped.”
How much might that be? Maybe $5 billion a year, maybe more. That’s means about 20% of the fraud gets through. If your “in-house filter” let 1/5 of the grounds of your coffee into the pot, you’d change filters.
This is the first highly-publicized nationwide IRS crackdown on identity theft, years after the problem began to spiral out of control. It’s surely coincidence, but it almost is as if the IRS, now that it has been barred from it’s preparer regulation power grab, has decided that maybe it really should do something about ID theft after all.
DES MOINES – The first bill the Iowa Legislature will send to the governor this year will align the Iowa and federal tax codes, a move that will reduce the amount of taxes Iowans pay to the state.
Although Republican Gov. Terry Branstad will thoroughly review the legislation, his spokesman said the governor supports the intent of Senate File 106 “and will likely support it.”
That’s good news. The sooner he signs it, the sooner the state can begin processing 2012 returns with Section 179 deductions, educator expenses, and a number of other provisions affected by the Fiscal Cliff legislation.
Up until now, I’ve given the President the benefit of the doubt about reforming our broken tax system. I just didn’t think tax reform was a big issue for his administraiton. But now I’m beginning to think he doesn’t care about tax policy at all.
What was the tip-off?
No matter the fiscal crisis, the President never misses an opportunity to propose tax increases on “the fat cats.” To the President, the fat cats are the people and the businesses he thinks can pay a “little more” to support their government. I’m not sure I buy his definition of fat cat. But I certainly don’t buy his definition of tax reform. Tax reform is about building a tax system that is fairer, simpler, and more economically efficient. If in the process it raises revenue, I’m fine with that, but I don’t think the primary goal of tax reform is to wring more money from the well-to-do simply because they are doing better than you are.
It’s been blindingly obvious from the beginning that the President has no interest in tax policy. Look at his record:
- Increases in top marginal rates, which creates incentives for more loophole-carving.
And his big current proposals are to limit deductions for corporate jets and screwing around with how private equity is taxed — symbolic and political gestures that would make the tax law even more complex. Any belief that the Obama administration cares a fig about tax reform requires more unfounded faith than a fourth marriage.
Central Iowa Culture Watch. The State Fairgrounds in Des Moines hosts the cultural event of the season this weekend: the Blue Ribbon Bacon Festival. Tickets routinely sell out in minutes, so if you have to ask, you can’t go. What will you miss? KCCI.com reports:
Start with the dress. It is made of real bacon, created by an East Des Moines dressmaker – and it is actually worn by the Bacon Queen…
“It wildly surpassed anything I thought was achievable. I mean, look at it, it sparkles,” said Porter.
Iowa is collecting more tax money than it is spending. Iowa House Republicans propose to give the money back as a one-time tax credit. The Des Moines Register reports:
The proposal would capture the state’s estimated $800 million budget surplus, divide it equally among the state’s income tax payers and issue an income tax credit to every taxpayer for his or her share. Senate Republicans said last week the credit amounts to $375 for individuals or $750 for couples who file jointly.
That means, for example, if a married couple’s state income tax liability was $1,000, they would receive a $750 tax credit, reducing the amount they were actually required to pay to $250. If a payer’s burden was less than $375, he would receive a credit equal only to his actual bill.
It’s a simple plan that treats the surplus as a non-recurring event. Unfortunately, there is nothing simple about Iowa’s tax law otherwise. I’d prefer to see it returned as part of a tax reform plan.
House Democrats prefer to spend the money, and the Governor wants some of it to fund his education reform plan. ISU economist David Swenson says the money should be run through the government:
Drawing on a statistical model that predicts economic impacts, he said $780 million in government spending could support roughly 2,000 more jobs than the same amount of spending by households.
Yes, the magical power of the government to transform your money into jobs. If we just gave the government infinite money, we’d get infinite jobs. If that worked, you’d think we’d have more jobs than ever, considering that Federal and state governments are spending more money than ever.
Tax return preparers who just recently were rushing to get their preparer tax identification numbers from the IRS before it starts accepting 2012 tax returns on January 30 are in limbo after a federal district court enjoined the Service from enforcing requirements under the registered tax return preparer (RTRP) designation.
The IRS’s online PTIN system appears to be unavailable. People familiar with the system are uncertain why the IRS took it offline and what its unavailability means for the hundreds of thousands of potential PTIN registrants.
“From a practical point of view, [the IRS] has already shut the [PTIN] system down,” said Dan Alban of the Institute for Justice and the lead attorney for the plaintiffs in Loving v. IRS, No. 1:12-cv-00385 (D.D.C. 2013) “Whether they are legally required to do so is the question.”
Well done, IRS! Preparers are required to have a PTIN. The IRS apparently tied it’s PTIN software to the preparer regulation system overturned earlier this month. Another triumph for tax administration.
TaxProf, What’s FATCA Got To Do With It? Tina Turner Renounces U.S. Citizenship. It’s always easier for the wealthy to avoid the ridiculous paperwork the tax law imposes on Americans abroad. It’s the little jaywalkers that get shot to ensure the serious money-launderers get slapped on the wrist.
Andrew Mitchel has posted two videos explaining Form 5471. Think that sounds dull? If you fail to report your interest in a foreign corporation, the $10,000 fine will make it interesting.
Alternative Maximum Tax introduced in Iowa House. The Republican leadership of the Iowa House of Representatives has introduced a new way to compute Iowa personal income tax. HF 3 would create an optional ”alternative base income tax”at a 4.5% flat rate. The bill would allow taxpayers to elect to be taxed on their federal Adjusted Gross Income before net operating losses, less a $6,200 standard deduction ($12,400 for joint filers and heads of households). The only credits allowed would be for estimated taxes and withholding. Taxpayers could instead continue to follow the existing tax law.
The bill would be a huge step forward for Iowa tax policyif it were enacted as a replacement for Iowa’s current tax, rather than an option. Eliminating all of the tax credits and special state deductions would greatly simplify everyone’s tax life, and lowering the rate would make Iowa much more attractive to businesses and newcomers. In this form, though, it’s just another computation, an alternative maximum tax. It’s like the alternative minimum tax, except you pay the lower tax computed, rather than the higher one. It was probably drafted this way to avoid a fight over eliminating the current deduction for federal income taxes on Iowa returns.
I will run some numbers to see how the HF 3 tax would compare with taxes computed the current way. The bill is co-sponsored by 54 representatives, including House Speaker Paulsen, so it’s a given that it will pass the House in some form. It will be interesting to see whether the Senate, controlled by Democrats, will bring this to a vote. The Governor has made clear income tax reform isn’t his priority this year.
This week Rep. Rosa DeLauro (D-CT) proposed an assault weapon buy-back program that would operate through the tax code:
“The SAFER Streets Act creates a $2,000 refundable tax credit ($1,000 for two consecutive years) for an assault weapon owner who turns in their firearm to the state police.”
…
This assumes the gun manufacturers cannot produce additional guns as fast as the old ones are destroyed, and that they cannot be produced, at this rate of production, cheaper than the buy-back price.
Ms. Curtis lost as badly as it is possible to lose in Tax Court. There is the 75% fraud penalty and the maximum sanction, $25,000, for frivolous arguments. She still might appeal, though. Presumably the Circuit will make relatively quick work of that and maybe pile on some more sanctions. Fine. Now the IRS has to start trying to collect from her.
Tax protester arguments can slow down the tax collector, but the tax man wins in the end.
It looks like the Republican leadership in the Iowa House of Representatives will be pushing income tax changes this year. Unfortunately, it looks like they are pushing the plan I call an “alternative maximum tax” like the one floated by Governor Branstad last year and quietly dropped after the election. O. Kay Hendersonreports:
House Republicans are calling for a “flat” state income tax. If their idea becomes law, Iowans would have the option of filing their personal income taxes under the current system — which has a top rate of nearly nine percent — or opting to pay a four-and-a-half percent rate, with no deductions.
The governor has made it clear property tax reform is his top priority, but House Speaker Kraig Paulsen of Hiawatha, the top Republican in the legislature, says Branstad hasn’t said no to cutting income taxes.
Any tax practitioner will point out that this will in practice just be one more complication in computing Iowa taxes. Taxpayers will compute their taxes under both the current system and the flat system and choose the one that results in the lower tax. I assume the legislative leaders are resorting to this awkward plan to get around the implacable opposition of the powerful Muscatine-based Iowans for Tax Relief to any tax reform that would repeal the deduction for federal taxes on Iowa returns. Their plan is likely based on that proposed by Iowans for Discounted Taxes.
Far better to just clean up Iowa’s tax law. Repeal the special interest loopholes and corporate welfare tax credits, get rid of all non-federal deductions, get rid of the deduction for federal taxes, tie the tax law to the federal code, drastically lower the rates, and eliminate the corporation income tax entirely. In short, enact The Quick and Dirty Iowa Tax Reform Plan.
Flickr image courtesy e53 under Creative Commons license
Whether or not Governor Branstad wants to deal with income taxes, he may have to. His neighbor in Nebraska may be forcing his hand. 1011Now.com reports:
Gov. Dave Heineman is calling for an overhaul of Nebraska’s tax system, saying the state needs to get rid of its individual and corporate income taxes and make up the lost revenue by shutting off as much as $2.4 billion in tax breaks for businesses.
The Republican governor unveiled his tax plan Tuesday during his annual State of the State address to lawmakers.
Heineman says his plan would keep the state competitive with two neighboring states, Wyoming and South Dakota. Both have no individual income tax.
IRS unveils simplified home office deduction for 2013. The IRS yesterday unveiled a new optional way to compute home office deductions. From IR-2013-5:
The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.
…
Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.
This will be handy. When you depreciate part of your home for a home office deduction, you lose the ability to exclude that much gain on a later home sale. Home office deductions are also complicated and a magnet for IRS examiners. This looks like it will be useful for the growing ranks of people who run businesses out of their home. Taxpayers will still be allowed to opt out of this new method and compute their home office deductions the old way. Full details are found in Revenue Procedure 2013-13.
Russ Fox, Is A Simplified Home Office Deduction Better? “The reality is that $5 per square foot understates the cost of most home offices, especially when factoring in depreciation.”
Due to the passage of the new tax law, the ability of the IRS to accept most farmers tax returns by March 1 is very uncertain. Senator Grassley’s letter indicates that the IRS has granted an extension in the past, most recently last year when the MF Global mess occurred. In that case, the IRS did not actually extend the filing date, but granted waivers of the penalty for any estimated tax penalty caused by MF Global untimely mailing of form 1099.
Farmers don’t have to make estimated tax payments if they file by March 1. If they can’t do that, the IRS can impose estimated tax penalties on the whole balance due. The late enactment of new tax laws for 2012 may make it impossible for the IRS to process returns by then.
Rush Nigut, Iowa Business Specialty Court Pilot Project. I hope it leads to a specialized Iowa Court for tax cases. Taxpayers are at a huge disadvantage arguing before District Court judges with no tax expertise.
My experience in tax practice convinces me that the estate tax is unnecessary to break up and dissipate large estates. Beneficiaries take care of that just fine.
Although the defendant claimed remorse, his actions after the time of the guilty plea continued the obstructive conduct. Hence, this defendant got no benefit from pleading guilty, and saving the Government and the court the time and expense of trial. Not only that, his obstructive conduct convinced the judge to sentence him at the top of the unreduced Guideline range.
If you want the judge on your side, it might be a good idea to stop committing the crime for awhile.
Might the Iowa legislature lead on income tax reform? If it’s going to happen, they will have to, as Governor Branstad only wants to talk about property taxes this year. O. Kay Hendersonreports:
During a recent interview with Radio Iowa, Governor Branstad made it clear he is focused on cutting property taxes.
“Sure, I’d like to see the income tax reduced, too, but in terms of my priority — and I’ve been working on this for a couple of years and we’re really trying to perfect it — our focus is going to be on significant property tax reduction and replacement,” Branstad said a month ago.
Some legislators are more ambitious, reports Henderson:
Representative Tom Sands, a Republican from Wapello, is the chairman of the House Ways and Means Committee that writes tax policy.
“I think there is some pressure building from Iowans to cut both income taxes — look at some reform as well as a cut to the individual income tax,” Sands says. “We’re hearing from corporations as well, on the income side.”
I doubt anything good will happen with income taxes this session. The Iowa Chamber Alliance even wants to to go the wrong way, pushing more tax credits for the well-connected. No organization seems to be pushing for the rest of us. But The Quick and Dirty Iowa Tax Reform Plan is ready to go if the legislature needs some ideas.
Contrary to the popular “urban tax myth” perpetuated by uninformed journalists, just because a person has the initials “CPA” after his/her name does not mean that he/she knows his arse from a hole in the ground when it comes to preparing 1040s.
But I’m not. It’s true, if roughly stated.
Robert goes astray in his next paragraph:
Only those individuals who possess the “EA” (Enrolled Agent) or “RTRP” (Registered Tax Return Preparer) designations have demonstrated competency in 1040 preparation by taking an IRS-sponsored test, and are required to remain current in 1040 law by taking a minimum number of hours in continuing professional education (CPE) in federal income taxes each year.
False. The RTRP test is open book. It demonstrates that somebody can read. It’s a literacy test, an empty exercise to justify the IRS power grab over the preparer industry. It’s different with Enrolled Agents, like Jason Dinesen and Russ Fox, who have to meet much stricter standards than RTRPs. One of the underreported nasty consequences of the RTRP designation is that it damages the EA brand.
I also disagree with the implied conclusion that CPAs who prepare returns are less competent as a group than EAs or RTRPs. Some are incompetent, no doubt, but many tax CPAs are highly-skilled. I think the competency curve for non EA preparers vs. CPAs would look something like this:
Substitute “RTRP” for “unenrolled preparer.”
There are excellent non-CPAs and there are incompetent CPAs. Still, I think as a group the CPAs who do tax for a living will tend to be more competent.
My rule of thumb for choosing a preparer: buy as much preparer as you need, but no more. Many taxpayers who only have wage and investment income and routine itemized deductions will do fine with an RTRP (and would have done fine with an unenrolled preparer without the new IRS preparer regulations). If you have business income, a multistate return, or a complicated financial life, your needs go up; you need a high-end RTRP like Robert, or an EA, or a CPA. As your business gets bigger, you are more likely to want to hire a good CPA. And when Robert gets to the bottom line of his post, I think he agrees.
The income tax rates, the estate tax, and the alternative minimum tax patch are all here to stay. And, according to the Tax Policy Center’s (TPC’s) preliminary study on distributional effects, the act essentially provided a big tax cut for almost everyone.
Funny, everybody’s taking home less. How does that work? My emphasis:
Using the Congressional Budget Office’s old baseline (which assumed that the Bush tax cuts would expire for everyone) and looking at the effects of the tax cut in 2018, the TPC says that the average taxpayer will receive a $2,335 tax cut under ATRA.
I see. Because the tax increase could have been bigger, we got a tax cut. I’ll see if I can cut staff accountant pay and convince them they got a raise because we didn’t cut more.
According to the latest IRS Data Book 60,623 of the agency’s 104,402 employees in 2011 were women. That 66 percent is far more than the 44-percent figure for government’s total civilian labor force and the 47-percent figure for the overall US civilian workforce.
New law webcast today! I will be participating in a webcast today on the new Fiscal Cliff law and other recent tax developments. The webcast, sponsored by the Iowa Bar Association, will start at noon. I will join Roger McEowen of the ISU Center for Agricultural Law and Taxation, and IRS Taxpayer Liason Christy Maitre. Cost: $35 for IBA tax school attendees and attendees of any 2012 CALT Farm and Urban Tax School; $35; $75 otherwise. Agenda here, registration page here. 2 hours of timely CPE and Tax Update fun!
No good will come of this. The 2013 session of the 85th Iowa General Assembly begins today, and the outlook for improvement in Iowa’s tax system is bleak. Iowa business groups have firmly embraced a state tax incentive policy based on taking money from all of us to bribe well-connected businesses to do things they would do anyway. From the Sioux City Journal:
Business groups like the Iowa Chamber Alliance, a non-partisan coalition representing 16 chambers of commerce and economic development organizations, are supporting a variety of tax credits to retain, grow and attract investments in the state. Those credits include restoring the $185 million cap on economic development tax credits that currently stands at $125 million for fiscal 2013.
Jason Hutcheson, chief executive officer of the Greater Burlington Partnership, said tax credits are a highly effective tool that deliver a high return on investment and are essential to retain, expand and recruit businesses and to attract technology and research. ICA members also are lobbying legislators to spend at least $25 million for business development incentives after the line item was shrunk to $15 million for the current fiscal year.
The politicians shed crocodile tears about just being forcedto go along with a system based on them granting special favors:
Senate GOP Leader Bill Dix of Shell Rock said there is opposition to government choosing winners and losers with taxpayer-funded incentives, but he added, “There’s no question in my mind that an incentive policy is the world we live in. I don’t appreciate that and wish it wasn’t the case, but we do need a policy that includes incentives.”
You know what would be a real incentive to grow a business in Iowa? A much simpler tax system with lower rates, one eliminating the corporate income tax altogether. Something like The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.
Instead, Iowa has a horrible system built around complexity and high rates, made less painful — even lucrative — for those with the connections and lobbyists to score targeted tax credits. The legislators hear from those people — not from the more numerous businesses who quietly set up shop in South Dakota or other more friendly tax climates.
The Iowa Research Credit is refundable, so Iowa writes a check when the credit exceeds the computed tax. The $45.2 million in corporate research credits claimed in 2010 resulted in $43 million in refunds.
The best we can hope for from the legislature is prompt action on ”coupling” legislation to conform Iowa’s 2012 tax law to the federal changes passed earlier this month. The 2012 filing of many Iowa returns is on hold until they do so. We’ll see if they can even accomplish that much.
Scott Drenkard, Governor Jindal’s Bold New Tax Plan (TaxPolicy Blog). Could you live with a higher state sales tax if the income tax goes away? Even if it taxes accounting services? Tempting.
A Midwestern economist says Iowa policymakers should focus on cutting income taxes rather than property taxes. Ernie Goss, an economist at Creighton University in Omaha, says Iowa’s income tax rates are fifth highest in the country.
“In terms of what Iowa needs to look at, in my judgement, given what’s going on in Kansas, what’s about to go on in Nebraska — Iowa’s neighbors — you need to look at income taxes, in terms of being more competitive,” Goss says.
Iowa property taxes are too high, but income taxes matter more for many taxpayers. While property taxes are a big deal to companies that own real estate, like a manufacturer or a big insurance company, income taxes can mean a lot more to a start-up or a tech company. Fortunately the Tax Update’s Quick and Dirty Iowa Tax Reform Plan is ready to go!
Making a dent in the deficit! A chart shows how much the tax increases on “The Rich” will reduce the $1.2 trillion federal deficit (new taxes in green, deficit in red)
Either the government spends a lot less, or taxes go up a lot for everyone. The rich guy isn’t buying
It’s Monday. Do you know if your payroll taxes have been remitted? Another sad story of a payroll service provider who decided he needed taxes withheld from his clients more than the IRS did. Digtriad.com reports that Arthur Weiss of Winston-Salem, North Carolina is going away for 15 years:
Case documents show Weiss operated professional employer organizations (PEOs), which provided payroll-related services to client companies. For his client companies, Weiss agreed to pay the employees, withhold and remit federal and state taxes, prepare and file the federal and state employment tax returns and provide workers compensation insurance (WCI).
Weiss did pay the employees and withhold the employment taxes, but he failed to remit the employment taxes, keeping them for his personal use.
PEOs that file taxes under their own names and ID numbers have a hidden danger: their clients can’t verify that the IRS has received their payments via the Electronic Federal Tax Payment System (EFTPS). Employers can use EFTPS to monitor payments when they use a payroll service that reports employee taxes under the employer’s own name and Tax ID number. This makes it necessary for taxpayers to investigate PEO-type providers very carefully before trusting them with payroll services. If your payroll taxes are stolen by your payroll provider, the IRS will come after you to collect. Not many employers can afford to pay payroll taxes twice.
Few thieves report their income honestly. From WHOTV.com:
Disgraced former Peregrine Financial CEO Russell Wasendorf Sr. is in jail awaiting sentencing for embezzling over $200-million in customer funds, fraud, and lying to federal regulators.
Now the state says he may have also cheated on his taxes.
…
Records show the [Iowa Department of Revenue] filed an assessment in November against Russ and Connie seeking $14.1-million in unpaid taxes and penalties to Iowa.
Tax breaks for Hollywood, NASCAR, windmills, algae and multinational corporations ended up in the “fiscal cliff” bill thanks to President Obama, according to Senate Republican sources. But they were spawned by a web of lobbyists, donors and staffers surrounding Democratic Sen. Max Baucus of Montana.
Baucus’ Finance Committee passed a bill in August extending 50 expiring deductions and credits for favored industries. At Obama’s insistence, the Baucus bill was cut and pasted word for word into the cliff legislation.
No cliff deal. As of this morning, the President and Congress continue to fail to to make a “fiscal cliff” deal. Rest assured, though, that even when they cobble together a lame and harmful deal, as they will today or weeks from now, they won’t even begin to address the real fiscal calamity — the government’s incontinent spending.
The unforgivable sin of the current president, and the last one, and their Congressional enablers, is spreading the idea that the government can buy us all free stuff, and the rich guy will pick up the tab. Sorry. The rich guy isn’t buying.
Income taxes: the redheaded stepchild of Branstad tax policy? It looks more and more like the Branstad agenda for the 2013 Iowa legislative session won’t include income tax reform. From the Sioux City Journal:
Asked during a recent interview if there was room in all that for income tax reductions during the 2013 session, Branstad replied: “Probably not.”
“Honestly, property tax would be my priority and I’d love to do income tax, too, and maybe, if revenues exceed expectation, we could provide some income tax relief in addition,” Branstad said. “But I think I would rather focus and get something permanent done on the property tax. That’s the place where we’re the least competitive.”
That’s a shame. Given the economically unwise attitude of the Senate leader, maybe nothing is possible:
Senate Majority Leader Mike Gronstal, D-Council Bluffs, said he would need more details but at first blush he doubted it would go very far in the legislative process if it proved to be “just a way for the wealthiest Iowans to cut their taxes dramatically” while middle-class families picked up a greater share of the tab for the cost of state government.
That’s just silly. The rich guy isn’t buying for Iowa either. The wealthiest Iowans always can dramatically cut their taxes with a moving van, until Senator Gronstal figures out a way to keep them from escaping to zero-tax South Dakota or Florida.
Iowa’s income tax is way overdue for replacement. Instead, it will get more Bondo and bumper stickers.
If Iowa’s tax law were a car, it would look like this.
When President Obama talks about taxing the rich, he means the top 2 percent of Americans. John A. Boehner, the House speaker, talks about an even thinner slice. But the current and future fiscal imbalances are too large to exempt 98 percent or more of the public from being part of the solution.
Ultimately, unless we scale back entitlement programs far more than anyone in Washington is now seriously considering, we will have no choice but to increase taxes on a vast majority of Americans.
Think Finland. Unless we choose to be Greece or Argentina.
The people who make the decisions at the highest level in this republic are either dishonest or utterly economically incompetent if they don’t say the following out loud: “We are demanding more out of our government than we can presently afford. We need to pay more, get less, or both.”
Anything missing? Not a word here about income tax reform. The governor had been talking about income tax reform in the runup to the elections, but hasn’t said much about it since. I’m getting the feeling that Iowa’s chilly business tax climate isn’t warming up anytime soon.
What the current model of the Iowa tax law would look like if it were a car.
They could have thought about that before they voted for it. From Byron York:
Sixteen Democratic senators who voted for the Affordable Care Act are asking that one of its fundraising mechanisms, a 2.3 percent tax on medical devices scheduled to take effect January 1, be delayed. Echoing arguments made by Republicans against Obamacare, the Democratic senators say the levy will cost jobs — in a statement Monday, Sen. Al Franken called it a “job-killing tax” — and also impair American competitiveness in the medical device field.
You mean taxes matter? Who knew? (via Instapundit)
Warren Buffett calls for another tax increase on people who aren’t Warren Buffett. From CNBC:
Warren Buffett isn’t limiting his call for higher taxes to a minimum rate for very rich Americans who get a large chunk of their income from investments.
He’s also one of several dozen wealthy people who have signed a statement calling for a “strong tax on the largest estates.” It’s been released by a group called “United For a Fair Economy.”
Like the income tax hikes he supports, this increase wouldn’t affect him, because he plans to leave his pile to the Bill and Melinda Gates Foundation, where it will escape estate tax. I’ll take him seriously if he calls for reducing or eliminating the estate tax charitable deduction. Going Concern has more.
In Iowa he’d have to collect sales tax too. The Tax Court yesterday told a Houston patrolman learned that he was in independent contractor when performing security services off-duty. From the decision (citations omitted):
An employment relationship is indicated when the service recipient has the right to control the details and means by which the worker performs the services. In contrast, independent contractor status is indicated where the opposite is true. This factor is generally critical in determining the nature of a working relationship. Petitioners did not demonstrate that the third parties maintained the requisite right to control Mr. Specks in the performance of the security services.
Jack Townsend links to a study of plea agreements in federal criminal cases. While much of his post is of interest only to attorneys, this quote from the study should be read by anybody tempted to file a return (or not file) based on the idea that the income tax is unconstitutional (my emphasis):
These constitutional challenges do not work out well for defendants. Almost twenty years ago, the United States Supreme Court held that a considered, fundamental disagreement with the constitutionality of the tax laws does not represent a valid defense to a charge of tax evasion. Yet even with this guidance, many tax resisters remain unwilling to concede the point, and demand to take their cases to trial. One exasperated federal judge catalogued some of the “tired arguments” advanced by these defendants:
That defendants continue to press these arguments in court despite their nonexistent odds of success underscores how many parties simply do not behave as extrapolation from likely trial outcomes might predict.
There’s no point trying to convince tax protesters that they are wrong in theory. All you can point out is that their arguments never work when it matters.
David Brunori, Time To Get Rid of the Deduction for State And Local Taxes. (Tax.com) When the taxes arise from business income, like from S corporations and partnerships, I disagree. It any case, it should only come with rate reductions.
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 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.
Iowa’s Governor Branstad seems to be serious about this tax reform thing. From WCFCourier.com:
Gov. Terry Branstad cautioned lawmakers against finding ways to spend the state’s projected budget surplus, while calling Monday for across-the-board tax changes.
Speaking at a Statehouse news conference, Branstad said he’s working on a tax reform proposal to “dramatically” cut personal, corporate and property taxes in the state.
Specifics would be announced later, he said, possibly when he delivers the Condition of the State speech next year.
An automotive representation of Iowa’s income tax.
Iowa’s basic tax system is little changed structurally from the one we had when the Governor took office the first time in 1983. Substituting rate schedules, you could almost prepare a 2011 Iowa 1040 on 1984 forms. You wouldn’t even have to substitute the rate schedule to prepare a corporate return; Iowa’s highest-in-the-nation corporation rate is unchanged since 1981.
While the basic structure is unchanged, the system has become infested with special interest deductions and credits over the years — a process that started under Governor Branstad and that got out of control during the 12-year interregnum between his fourth and fifth terms.
But Governor Branstad also has some history as a tax cutter. He signed a big rate cut that took effect in 1987, reducing Iowa’s highest individual tax rate from an insane 13% to a still painful 9.98%. Yet that cut left the basic Iowa structure — including the individual deduction for federal income taxes — untouched. When he made the huge allocation to the Orascom plant, he was at least embarrassed enough to say that it was an argument for corporate tax reform.
So will the Governor go big? Will he embrace important elements of the Tax Update’s Quick and Dirty Iowa Tax Teform Plan, which would eliminate Iowa’s corporation tax and cut individual rates to around 4%, while sweeping away the federal income tax deduction and all special carve-outs? Stay tuned.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
Disclaimer
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Alternative Maximum Tax introduced in Iowa House. The Republican leadership of the Iowa House of Representatives has introduced a new way to compute Iowa personal income tax. 
Any tax practitioner will point out that this will in practice just be one more complication in computing Iowa taxes. Taxpayers will compute their taxes under both the current system and the flat system and choose the one that results in the lower tax. I assume the legislative leaders are resorting to this awkward plan to get around the implacable opposition of the powerful Muscatine-based 
New law webcast today! I will be participating in a webcast today on the new Fiscal Cliff law and other recent tax developments. The webcast, sponsored by the Iowa Bar Association, will start at noon. I will join Roger McEowen of the ISU Center for Agricultural Law and Taxation, and IRS Taxpayer Liason Christy Maitre. Cost: $35 for IBA tax school attendees and attendees of any 2012 CALT Farm and Urban Tax School; $35; $75 otherwise. Agenda 
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
