Iowa House Passes Alternative Maximum Tax: Income Tax Option Clear of Carveouts

I’ve never filled out an Iowa income tax form but it looks like one of the harder state tax returns. Iowa allows you to deduct what you pay in federal income tax, which is nice but is that much more calculation work (and probably drives up tax rates). There are lines for the lump-sum tax, the minimum tax, the K-12 textbook credit, the school district surtax, the motor fuel tax credit, and the earned income tax credit. I’m sure each one of these has their explanations of necessity but together it sounds like a lot of paperwork, record-keeping, and Tax Filing Day frustration.

Finally, the Iowa tax table is nine tax brackets, the first seven of which are below $30,000. Of course, the state provides a booklet to ease tax calculation but it still seems needlessly complicated.

Hence, I’m impressed by a bill passed yesterday (House File 478) by the Iowa House which would offer an alternative to all Iowa taxpayers: a 4.5 percent tax on all income above about $15,000, which no further deductions or exemptions. It’s not perfect: our friend Joe Kristan pointed out that a credit for taxes paid to another state and a deduction for federal interest are probably constitutionally required, and offsetting deductions to certain kinds of income (allowing gambling losses if you tax gambling winnings) is good policy. But as Joe said, the bill “is a welcome step towards improving Iowa’s income tax.”

The Legislative Services Agency estimates that taxpayers who earn between $30,000 and $40,000 would see the most benefit, although 492,000 taxpayers would see a reduction. Iowa’s top income tax rate of 8.98 percent is among the highest in the country and higher than all neighboring states (see table below).

The bill reportedly will have a tough time in the Senate.

Top State Income Tax Rates, 2013

*-New York refers to non-New York City tax rates. New York City refers to the combined state and city income taxes. New York and New York City tax brackets are 2012 figures, as 2013 inflation-adjusted figures have not yet been released. New York also has a benefit recapture provision, meaning that higher tax rates apply to all income of some taxpayers, not just income above the bracket threshold.