Governor Tom Vilsack today called on the state legislature to make “dramatic” changes in Iowa’s tax system. Vilsack says Iowans have “an expectation” for such a “big idea.” Vilsack wants to cut or completely eliminate state taxes on pensions and Social Security income. In addition, he suggests doing away with the state tax deduction for any federal taxes paid. In return, he would reduce the number of state income tax brackets to simplify Iowa’s tax system. That “federal deductibility” maneuver artificially inflates Iowa’s income tax rates, according to Vilsack. “Our income tax system currently today with federal deductibility is an absolute barrier to competitiveness of this state and it has got to be at this point in time removed,” Vilsack says. The governor says business leaders merely look at Iowa’s high income tax rates and don’t notice the asterisk that denotes the rates are — in real dollars — lower because of that deduction for federal taxes paid. He says the business leaders don’t understand the federal deductability and don’t even know it exists. Iowa is one of just four states which allow residents a deduction for their federal taxes. Vilsack says his plan would be fairer and simpler. Vilsack has long sought to get rid of the deduction for federal taxes paid and to reduce the number of tax brackets. At this time last year, he even suggested he’d consider a flat rate. Today, the democrat governor says he’s making a concession to republican lawmakers by calling for an end to the state taxes on pensions and Social Security income. In addition, Vilsack says he and other democrats want to raise the earned income credit to ensure more poorer Iowans do not pay taxes at all. Vilsack also wants lawmakers to continue work on revamping Iowa’s property tax system and to give his idea of expanding the number of services which would be subject to the state sales tax a second chance. If the wide-ranging package Vilsack outlined today becomes law, the governor pledges to help pass an amendment to the Iowa Constitution which would do away with the legislature’s power to raise taxes and force a general vote of the people before any future state tax increases could go into effect.
