Cedar Rapids Gazette

March 20, 2007

Page 8A

Change to tax credit studied
By James Q. Lynch
The Gazette

DES MOINES — As part of their goal to “make work pay,” Iowa House Democrats are looking at changes in the state’s earned income tax credit that directs money to low-income working Iowans.

In 2004, about 13 percent, or 169,000, of the state’s nearly 1.3 million households filing an income tax return claimed either the federal earned income tax credit or both the federal and state credits, according to the Child & Family Policy Center in Des Moines. House File 293, a bill floor managed by Rep. Tyler Olson, D-Cedar Rapids, would make the Iowa credit refundable, which would cost the state treasury about $8.4 million and bump up the tax credit rate until the total cost to the state would be about $10 million.

That shouldn’t be considered a cost, however, Deborah Helsen of the United Way of Central Iowa told the subcommittee.

“Think of it as an investment in the community by putting money into the hands of people who will use it,” she said.

The changes in HF 293 could increase the number of Iowans receiving the credit and the amount they receive, Tiffany Smith of the Child & Family Policy Center told the subcommittee. That, like the increase in the minimum wage approved earlier in the session, would encourage Iowans to work and reduce the impact of income taxes on low-income Iowans.

A working family of four in Iowa begins paying state income taxes when its income reaches $18,338, which is less than the poverty level. A family of four that made $30,000 in 2005 was eligible for a refundable federal earned income tax credit of $1,524, but owed $1,303 in state income tax.

At the federal level, the maximum earned income tax credit for 2006 was $4,536 for a married couple with two children or $412 for a single individual or couple without children. Unlike the minimum wage, the amount of the maximum credit is adjusted for inflation each year.

Iowa’s tax credit is 6.5 percent of the federal earned income tax credit, which benefits working people with earned income of less than $38,348 a year. The size of the credit depends on the tax filer’s income, number of dependents and marital status.

The federal earned income tax credit is refundable, which means if the amount of the credit is larger than the federal tax owed, the taxpayer gets a payment for the difference. If Iowa changes to a refundable credit, Olson said, households that don’t make enough to pay income tax or enough tax to receive the full credit would benefit. The proposal is a priority with Democrats, Olson said. It also has bipartisan support, says Senate Minority Leader Mary Lundby, R-Marion.

“If we raise the cigarette tax and the gas tax and all the fees that are going to be coming in the Democrats’ budget, we’re going to be coming down hard on those in the lower end of the tax bracket,” Lundby said. “Republicans are always willing to take part in a tax reduction conversation.”

That conversation should include discussion of lower tax rates, commercial property tax relief and changes in the state inheritance tax for property passed on to nieces and nephews and other nonlineal descendants, Lundby said.