Iowa lawmakers push competing tax proposals

DES MOINES – Iowa lawmakers advanced competing income tax reduction plans over the past week in the Republican-majority House and Democratic-controlled Senate and a compromise deal was not yet clear.

The House on Wednesday passed a bill to offer a flat income tax option. Under their legislation, residents could pay a 4.5 percent state tax on income instead of the current progressive tax rates, which range from 0.36 to 8.98 percent, depending on income level. Most deductions and credits wouldn’t be available to those paying the flat tax.

A Senate committee approved legislation Monday that would provide increased tax credits to low income residents. The plan would raise the state credit from 7 percent to 20 percent of a taxpayer’s federal earned income tax credit. Lawmakers said the measure would apply to households with incomes of less than $45,000, and about 210,000 households would get a roughly $250 tax break. A Republican effort to expand the credit to more taxpayers failed.

Republicans said they want to provide tax cuts to more people than the Democrats would. Democrats, who are focused on low-income residents, said the Republican plan provides bigger breaks to top earners and does little for the needy.

The two proposals were so different that Republican Gov. Terry Branstad described them as “two ships passing in the night.”

Lawmakers said they were prepared to work together, but just what might win bipartisan support and the backing of the governor was unclear. Republicans have supported earned income tax credits bills in past years as part of a bigger set of tax proposals, but Branstad has previously vetoed increases to the credit. Branstad has said his priority this year is to reduce the state’s commercial property taxes, so lawmakers might be able to work out a compromise deal that includes cuts to income taxes and property taxes.

But without movement from all parties, the session could easily conclude with little changing on income taxes – or property taxes – as has happened in past years.

Rep. Chip Baltimore, R-Boone, who managed the flat-tax bill on the House floor, said he’d like to see a tax cut plan get broad approval.

“We’re going to continue to propose as many ideas as we can, hoping eventually one of them will stick,” Baltimore said. “We can’t seem to reach agreement on property taxes and that’s been a struggle. Two years ago we couldn’t reach agreement on a 20 percent across the board income tax cut, but we’re going to continue to come up with ideas because that’s what Iowans are asking us to do.”

Baltimore said this year was frustrating because the state has a growing budget surplus that could be used for tax breaks. It’s estimated that the year-end surplus could be as much as $800 million.

“If we have excess money left over and we can’t reach agreement on what do with it, unfortunately it will have to sit,” Baltimore said. “That’s certainly not our preference here in the House.”

Democratic Sen. Joe Bolkcom, of Iowa City, said he hoped the two sides could find common ground over helping low-income residents.

“Our tax policy is trying to provide tax relief to low wage working Iowans that currently pay a disproportionate share of taxes,” Bolkcom said. “Where’s the common ground? It remains to be seen.”

Rep. Tyler Olson, D-Cedar Rapids, said it was unlikely there would be any resolution on income taxes until lawmakers deal with proposals to cut the property tax.

“I think there’s room for an income tax cut as well, but I think in reality that decision is not going to be made until after property tax reform is done and a budget is done,” Olson said.

Dueling property tax plans are also being debated in the Capitol. Branstad has proposed a property tax plan that provides a gradual 20 percent reduction in commercial property assessments. Democrats have put forth a plan in which commercial property owners would gradually get a tax credit equivalent to a roughly 40 percent cut on their first $324,000 in assessed property value. The Democratic plan would not be funded in weak budget years.

Democrats say their proposal would help small businesses more than Branstad’s plan, while Branstad says tax credits don’t provide predictable tax relief.

Branstad said it was too early to tell what would get worked out before the session ends. The official last day is May 3, though it could run longer if a budget deal is not worked out.

“I’ve been through many a legislative session since 1973. This is what they call the falling apart. The beginning of the session is wonderful and everyone works together. Then you have this falling apart in the middle, then at the end you hope everyone comes together and you can get the compromises and work out the differences,” Branstad said.

Copyright 2013 The Associated Press.