The Iowa Democratic Party has suggested changes to its income-tax reform plan to benefit low- and middle-income earners in the state. The original plan proposed lowering rates for all taxpayers by using the revenue from the elimination of federal deductibility. However, the proposed amendments include an increase in the standard deduction and a refundable tax credit of $100 for Iowans who are enrolled at least part-time in post-secondary education. These changes are expected to increase the number of low- and middle-income Iowans who will see a tax reduction. In total, 73% of taxpayers will either experience a tax cut or no change in their taxes as a result of the plan. However, these revisions will no longer be revenue-neutral, costing the state approximately $20 million for tax year 2009 and $35 million for tax year 2010.
Despite the increased cost to the state, the revised plan will benefit low- and middle-income earners, who have traditionally been left out of Iowa’s tax system. Over the last two decades, Iowa’s tax code changes have consistently benefited upper-income taxpayers. The new changes aim to increase progressivity in the system, which is already the most progressive of all Iowa taxes. However, the system still falls short for many families, particularly low- and middle-income families with children. These families may pay no federal income tax due to exemptions and deductions in the federal tax code but still pay state taxes due to Iowa’s tax system’s inadequate recognition of the cost of raising a child.
The proposed amendments to the income-tax reform proposal are expected to deliver its benefits more disproportionately to low- and middle-income taxpayers compared to the original proposal. The initial proposal resulted in tax cuts for 49% of Iowa taxpayers, no change for 18%, and increased taxes for 33%. With the new amendments, the revised plan results in tax cuts for 60% of Iowa taxpayers, no change for 14%, and increased taxes for 26%.
The proposed amendments to the income-tax proposal aim to increase the fairness of the Iowa tax code for all families while directing most of their benefits to low- and middle-income taxpayers. The changes are expected to increase progressivity in the state’s income tax system and benefit low- and middle-income families, who have traditionally been left out of the tax system. However, the revised proposal is no longer revenue-neutral and will cost the state approximately $20 million for tax year 2009 and $35 million for tax year 2010.