March 2008

Promises, Promises

by Amy K. Frantz

Earlier this year, Governor Culver suggested an exploration of a “comprehensive initiative to address nagging inequities and complexities in Iowa’s tax system,” including a repeal of federal deductibility along with a reduction in state personal income tax rates.[1]  History suggests, however, that Iowa taxpayers would be ill advised to give up a tax deduction in exchange for a promise of lower tax rates.

Iowa taxpayers are currently able to deduct their federal income tax payments from their net income when filing an Iowa income tax return.[2]  Federal deductibility protects Iowans from paying a tax on income that is used solely to pay another tax – money that, in many cases, Iowans do not even see as it is taken from their gross income before they receive a paycheck.

For as long as state elected officials have proposed doing away with our right of federal deductibility, the proposal has been coupled with a promise of lower tax rates or other reductions in taxes. Governor Culver is no different, indicating that if federal deductibility were eliminated, “he would like to see the proceeds used to lower state income tax rates in a way that was revenue-neutral to the state or that provided tax relief to working families.  He also said property tax relief might become part of that overall reform discussion.”[3]

Can we believe in the promises of lower taxes in order to surrender our right to federal deductibility? Even if our current elected officials strike the bargain in good faith, and do deliver tax rate reductions to accompany the removal of federal deductibility, the problem is that current promises are certainly not binding on future politicians.

A prime case demonstrating this problem can be seen in the current proposal to make the School Infrastructure Local Option (SILO) tax into a statewide one-cent sales tax. Since 1998 citizens of Iowa’s counties have been able to vote to approve a SILO tax to raise funds for school infrastructure needs or property tax relief.  The SILO tax is limited to ten years, at which time citizens must vote to continue it, or it will end.[4]

Ten years ago, Representative Christopher Rants, now the House Minority Leader, helped guide the SILO tax legislation to approval in the Iowa Legislature. Rep. Rants “remembers making three promises:  One, the power will always be in the hands of local voters; two, the tax would only last 10 years before the vote would need to be held again; and three, the money would only be used for school construction.”[5]

Now, however, control of the Legislature has changed hands, and Legislators are considering a proposal to replace the SILO tax with a permanent, statewide one-cent sales tax. What about Rep. Rants’ promises that the authority to impose this tax would remain with local voters and would sunset every ten years?  The current Legislature feels no duty to live up to promises made ten years ago by a member of the now-opposition party.  And what about the third promise to use the tax money only for school infrastructure?  Right now, Legislators are pledging that this part of the program will remain intact, but as we are acutely aware, this promise is certainly not binding on future Legislators, who may decide these funds should be spent elsewhere.

Proposals to eliminate federal deductibility for Iowa taxpayers often come with a promise to reduce state income tax rates.  Even if such a deal were struck with current elected officials in good faith, future politicians will feel no obligation to live up to the promises made by those in the past. Iowa taxpayers should guard the right to federal deductibility, and not give it up in exchange for promises that will, without doubt, be broken one day.

Amy K. Frantz is Senior Research Analyst at Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry.

[1] Rod Boshart, “Culver to seek repeal of federal deductibility,” The Cedar Rapids Gazette, January 6, 2008, p. 14A.

[2] For more on the issue of Federal Deductibility, read “Federal Tax Deductibility in Iowa: Who Benefits and Why it Should Continue,” by Jonathan Miltimore, a December 2007 Policy Study from Public Interest Institute.

[3] Boshart.

[4] For more on the issue of the SILO tax, read “Is the SILO LOSST?,” by Deborah D. Thornton, a December 2007 Policy Study from Public Interest Institute.

[5] Dan Gearino, “School tax debate is personal fight for some,” The Quad-City Times, January 28, 2008.