Democrats in the Iowa Legislature are proposing a “middle class” tax cut that would lower or keep taxes the same for two-thirds of Iowans and get rid of a tax break that’s popular with many Republicans. That tax break allows Iowans to deduct their federal tax bill from their income before calculating their state income taxes, but critics say it artificially inflates Iowa’s top income tax rate — making the state uncompetitive in the business world. 

Senator Joe Bolkcom, a Democrat from Iowa City, says the plan will make Iowa’s tax forms simpler, too. ”As this recession continues to play havoc with our economy and with the family budgets of a lot of Iowans, we think now is the time to make a major reform in our income tax code,” Bolkcom says, “to put more money back in their hands.” 

The top income tax rate will fall to just below seven percent and Bolkcom says the tax forms will be simpler, too. ”It’s not every day you can give a tax cut or no change to two-thirds of Iowa taxpayers,” Bolkcom says.  “This is a big deal.”

Representative Paul Shomshor, a Democrat from Council Bluffs, says getting rid of that tax break and lowering Iowa’s top income tax rate will make the state more attractive for businesses. ”Iowa looks like — under the current tax system — that they have an artificially high income tax rate at 8.98 percent.  We’re compared to the other four highest states: California, Vermont, Rhode Island and Oregon,” Shomshor says.  “I don’t think we want to be compared to those four other states.” 

Groups like the Iowa Taxpayers Association and the Iowa Chamber Alliance which represents the 16 largest chambers of commerce in Iowa support getting rid of this tax break.  Shomshor says the change Democrats propose would make Iowa’s top rate almost equal to Nebraska’s, for example. “When you have somebody sitting in a corporate board room in New York or California, looking at tax rates and where to expand business in this country, Iowa doesn’t get a fair shake so this is an important piece of legislation,” Shomshor says. “I’m hopeful the legislature will act on this rapidly and we’ll have change that’s good for middle class families and businesses in this state.”

Democrats concede one-third of Iowans would likely see a “slight increase” in their income taxes under the plan and Senate Democratic Leader Mike Gronstal of Council Bluffs is unapologetic. ”We want to put money in the hands of middle class taxpayers,” Gronstal says. “…So obviously you’ve got to take that from somewhere.”

House Republican Leader Kraig Paulsen of Hiawatha says he doubts lowering Iowa’s top income tax rate will make Iowa a more viable site for business expansion. “Raising taxes on Iowans does not make Iowa more attractive,” Paulsen says. 

Senate Republican Leader Paul McKinley of Chariton calls the proposal a “job killer.”

“Democrats continue to want to saddle Iowans with more taxes which is absolutely the wrong thing to do,” McKinley says, “particularly when we’re in the depths of one of the biggest recessions we’ve seen.”

While Republicans vow to fight the plan, Democrats hold a majority of seats in the Iowa Legislature and Democratic leaders indicate they have enough votes to pass the proposal.  Governor Culver has repeatedly said taxes should not be raised during a recession, but Gronstal — the Democratic leader in the senate — asserts Culver will sign the plan into law anyway.  ”We are confident the governor believes in a middle class tax cut,” Gronstal says.

Click on the audio link below to hear Democrats’ news conference featuring Bolkcom, Shomshor, Gronstal and House Speaker Pat Murphy, followed by Republicans’ news conference featuring Paulsen and McKinley.

AUDIO: Democrats and GOP news conferences (mp3 runs 30 min)