New Report: Tax Breaks and Iowa's Seniors
Iowa Fiscal Partnership
DES MOINES, Iowa (April 19, 2005)
– Iowa’s personal income tax system offers generous treatment to
retirees, according to a new analysis that points to a looming loss of
resources to serve the state’s growing elderly population and other
essential needs.
As the
state’s income-tax filing deadline is approaching and Iowa legislators
are working on the state’s budget, the Iowa Fiscal Partnership – a
nonpartisan budget watchdog initiative – is renewing a call for
fairness and attention to accepted principles in the adoption of any
tax policy.
“The
political dialogue this year, as in years past, has been too focused on
purported benefits of tax exemptions without a demonstration of their
effectiveness, and without attention to what is lost when revenues
aren’t adequate,” said Charles Bruner, executive director of the Child
& Family Policy Center (CFPC) in Des Moines. “Our review
demonstrates that we already face big challenges in serving our elderly
population, and that we simply can’t afford new tax breaks for the wealthiest retirees.”
In a new
report for the Iowa Fiscal Partnership (IFP), Bruner and CFPC colleague
Mike Crawford examine how Iowa’s current personal income tax system
affects six different types of tax filers, from retired and working
families, with and without children.
“What we
see is that Iowa already gives substantial tax preferences to Social
Security and pension income, and that it doesn’t perform well in
assuring that taxpayers with similar ability to pay are treated
equitably,” Crawford said. “Iowa’s system also doesn’t offer much
recognition of the cost of raising a family. We should have a tax
system that more resembles the federal system in this respect and
provides better benefits to working families with children.”
As an
example, the authors noted that Iowa does not tax Social Security
income for couples whose “provisional” income is at or below $32,000.
This “provisional” level of income is an adjustment reflecting the
state’s exemption of half of all Social Security benefits from
taxation. In other words, a couple making $39,000, with $14,000 of it
from Social Security, is considered to have $32,000 in income because
half of the Social Security benefits aren’t counted. At that income
level or below, the couple has the further benefit of having none of
the benefits taxed.
“Given
some of the political debate surrounding that issue, it might surprise
many Iowans to learn they would not face any tax on their Social
Security benefits. Eliminating the tax for those who do actually would
benefit only higher-income retirees,” Bruner said. “As it is, those
highest-income retirees still are exempt from paying tax on half the
Social Security benefits they receive.”
Iowa also has a $6,000 individual exemption ($12,000 for couples) on pension income.
“These
preferences come with a price tag,” Bruner said. “As those tax breaks
stood in 1999, they cost the treasury about $110 million, and are going
to increase in cost as society ages and retirees have more retirement
income.”
Likewise, the preferences mean Iowans with similar incomes don’t necessarily pay the same in taxes. As examples:
—
A working couple who made $35,000 in 2004 would pay $1,485 in Iowa
state income tax; a retired couple at that income, nothing.
— A working individual who made $35,000 in 2004 would pay $1,503; a retired individual at that income, $356.
— A working couple who made $55,000 in 2004 would pay $2,870; a retired couple at that income, $640.
— A working individual who made $55,000 in 2004 would pay $2,622; a retired individual at that income, $1,572.
Further
calculations in the report show the treatment of families. State income
tax liability for a working couple making $55,000 and raising two
children, for example, is 3 1/2 times that of a retired couple with the
same income, and higher than it is for a retired couple making $80,000.
Bruner
said it was important to recognize – as demonstrated by a poll
commissioned by the IFP in 2004 and supported by separate polls for the
Des Moines Register and AARP – that Iowans believed recent tax breaks
have benefited wealthy individuals and multi-state corporations, and
that they would favor specified tax increases to raise revenue for
services. A report about that poll, and other reports on budget issues,
is available at the IFP website, www.iowafiscal.org.
“The
Iowa income tax system needs to be reformed, but not through additional
cuts and exemptions. It needs to be made fairer and simpler, and it
needs to be capable of continuing to provide needed revenue, over
time,” the authors stated.
The
Iowa Fiscal Partnership is a joint effort of two nonprofit, nonpartisan
organizations, the CFPC and the Iowa Policy Project in Mount Vernon.
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