Middle-Class Income Protection Act
My plan for an Iowa income tax cut for middle-income families, which I’m calling the “Middle Class Income Protection Act,” offers the largest income tax cut in more than 40 years. A family earning between $80,000 and $90,000 annually will see an average tax cut of $1,013.00.
I wanted to share some background about the tax cut and the reasons I’m proposing it. I promised a campaign of bold ideas and serious policy initiatives. Reforming an outdated tax system and giving middle-class Iowans a break is at the top of my list.
The reality is no one has been squeezed harder in the Great Recession and its aftermath than the hardworking middle-class Iowa families who are holding down jobs and trying to raise families. One of the most important things a Governor can do for families is to help them keep a little more of what they’ve earned.
The plan is driven by two factors:
1. The ever-increasing stress on middle-income families with children at home, when it comes to making ends meet; and
2. The rising number of dual-income households in which having two parents work outside the home is no longer a choice, but a necessity.
Iowa’s middle class has been squeezed too much for too long and its time to give these families a much-needed break.
WHO BENEFITS FROM THE HATCH TAX CUT?
The short answer is nearly everyone. The specific changes I’m proposing, though, put the bulk of the tax breaks right in the middle of Iowa’s income distribution. The Iowa Department of Revenue (IDOR) reviewed my plan and concluded:
“In tax year 2015, after federal deductibility is completely eliminated, taxpayers with AGI below $200,000 are, in total, expected to see a tax decrease, with the higher filing threshold and higher dependent credit helping those at the bottom, and the modified tax rates helping those in the middle.” [Correspondence, IDOR to LSA & Hatch, 10/28/13.]
Nearly every Iowan will see some kind of tax reduction. But those who are able to take advantage of new tax credits in the plan (per-child tax credit and dual-income credit) will benefit even more.
WHAT DOES THE HATCH PLAN DO?
My plan makes five major changes to the current state income tax system, including:
· Raising the per-child tax credit from $40 to $500. Iowa’s current per-child credit of $40 is an embarrassment, and the increase will reward working parents and bring the credit in line with other states that offer meaningful credits.
· Exempting the first $1,000 in secondary earner’s wages. Because Iowa has the highest percentage of dual-income households, a “dual-wage-earner” credit will give a break to households where both parents have to work to make ends meet and acknowledge the sacrifices that go into working so hard to raise a family.
· Raising filing thresholds for individuals and families. The thresholds for single filers under age 65 (below which there is no tax liability) would go up from $9,000 to $20,000 and for others under 65 from the current $13,500 to $24,500. This change helps Iowa retain a progressive income tax system while giving middle class taxpayers a break.
· Changes to tax rates by bracket and top bracket reduction. The current eight rates and brackets is reduced to just four rates (3 pct, 4 pct, 6.2 and 8.8 pct). The top rate falls from 8.98% to 8.8%.
· Elimination of federal deductibility. Iowa is one of the few states allowing the deduction of federal income taxes paid against state income taxes. The provision in Iowa’s tax code makes Iowa’s rates appear artificially high.
WHAT DOES THE PLAN COST?
The proposed changes are estimated to reduce the state’s ending balance by $309.1 million in tax year 2014 and $304.2 million in tax year 2015 once the elimination of federal deductibility is complete. The state now has a surplus of approximately $800 million, which will certainly change in the intervening years prior to the plan being approved by the legislature.
In addition, strong revenue growth (9.7 percent increase year over year as of this writing) causes me to believe Iowa’s revenues will be higher than they were during the worst economic crisis in the past 75 years. That would mean even more revenue into state coffers, and the potential for another re-examination of our income tax system.
For now, the plan gives back approximately one-third of the existing surplus in the form of tax relief. This is intended to be a cautious approach. I would prefer to give back more taxpayer dollars, but being fiscally responsible is the bedrock of any tax policy.
I look forward to hearing your thoughts on the Middle Class Income Protection Act or any other issue as the campaign for Governor goes forward. I’ll continue to offer serious, workable plans that will tell you what kind of Governor I will be. I’ll also benefit from our conversation, which will make me an even better leader for the State of Iowa.