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House moves one step closer toward elimination of pension and
social security taxes
House Republican-led effort would keep seniors within Iowa’s borders
(DES MOINES) – The Iowa House Ways and Means Committee voted to eliminate the
personal income tax on pension and social security benefits.
The legislation, House Study Bill 502, is a five-year phase-out of the state tax
on both pensions and Social Security benefits. The phase-out in HSB 502 begins
in calendar year 2007. It passed on a 19-6 vote, with six Democrats voting
against the bill.
The panel’s chairman, Davenport Rep. Jamie Van Fossen, said the legislation is
long overdue.
“I have often questioned how many more families needed to leave the state before
this Legislature acted,” he said. “These are our parents and grandparents. The
wealth they provide is beyond the minimal hit to the state’s budget.”
Currently, Iowans pay income tax on pension income above $6,000 (single filers)
and $12,000 (married, joint filers). Iowans also pay income tax on social
security benefits above $25,000 (single) and $32,000 (married, joint). No more
than 50 percent of Social Security benefits can be taxed for Iowa individual
income tax purposes, but 85 percent of Social Security benefits received can be
taxed for federal income tax purposes.
“These individuals have paid into their system all their lives,” said Nevada
Rep. Jim Kurtenbach, the committee vice-chairman. “The way it is now, if seniors
want to remain in Iowa, we bleed them dry. This tax is regressive and we
accomplished a great thing for seniors.”
Van Fossen said he personally knows more than a dozen families in the Quad
Cities who have moved to Illinois for its friendlier tax structure.
“This phase-out makes Iowa more competitive and will keep our retirees from
leaving the state,” said Van Fossen. “Iowa retirees are an asset to the state,
and these Iowans are a vital part of our economy, as they invest in our
communities. With the approaching retirement of the Baby Boom generation, this
legislation is important to approve.”
The bill is now eligible for full debate in the House. House Speaker Christopher
Rants, R-Sioux City, and House Majority Leader Chuck Gipp, R-Decorah, are both
supportive of the bill.
Social Security Benefits
Currently, 26 of the 41 states (and the District of Columbia) that have
broad-based personal income tax structures do NOT tax social security benefits.
Iowa is one of only 15 states that still taxes social security benefits. The
other states that tax social security benefits are:
§ Colorado
§ Connecticut
§ Kansas
§ Minnesota
§ Missouri
§ Montana
§ Nebraska
§ New Mexico
§ North Dakota
§ Rhode Island
§ Utah
§ Vermont
§ West Virginia
§ Wisconsin
Pension Income
Most states that impose an income tax exempt at least part of pension income
from taxable income. There are only three states fully exempt all public and
private pensions from taxation, these states are:
§ Illinois
§ Mississippi
§ Pennsylvania
Currently, seven states fully exempt public pensions (federal civil service,
military, state and local government pensions) from taxes but do not fully
exempt private pensions. These states are:
§ Alabama
§ Hawaii
§ Kansas
§ Louisiana
§ Massachusetts
§ Michigan
§ New York
The table below illustrates the reduction in General Fund revenues due to House
Study Bill 502**:
Fiscal General
Year Fund Revenues
2007 $ -4.3 million
2008 $ -54.1 million
2009 $ -108.8 million
2010 $ -166.9 million
2011 $ -224.6 million
2012 $ -249.2 million
** This information is according to a fiscal note from House File 461 in 2005
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Gov. Vilsack Gives Condition of the State and Introduces
his Budget
Here is a quick review of the Governor’s budget recommendations for FY 07:
For FY 07, the Governor recommends $5.306 billion in general fund spending, an
increase of $367 million or 7.4 percent over the $4.939 billion appropriated for
FY 06 (prior to supplemental appropriations). When the Governor’s supplemental
appropriations of $24.9 million are added in, the increase for FY 07 is $342
million, or 6.9 percent above adjusted FY 06.
The good news is that the Governor’s expenditure limitation is only $45 million
above the expenditure limitation set by the December REC. The bad news is that
it does not include any revenue from the proposed cigarette tax increase. The
Governor is recommending an 80 cent per pack increase starting in FY 06. He
believes this will raise $31.5 million in FY 06 and $129.9 million in FY 07.
This money is transferred into the Healthy Iowans Tobacco Trust and then
appropriated for Medicaid.
When the $129.9 million in cigarette tax revenue is added in, the Governor’s FY
07 expenditures total $5.436 billion, an increase of $497 million or 10 percent
above unadjusted FY 06.
The other major revenue increases proposed by the Governor are $25 million for
combined corporate reporting, $7.4 million for increasing the beer tax and $6.3
million in various fine increases.
Major expenditure increases for FY 07 are as follows:
Ø $84.3 million for School Foundation Aid (4 percent allowable growth)
Ø $51.1 million for Medicaid (does not include $167.7 million in non-general
fund spending)
Ø $39.9 million for property tax credits (does not include $119.7 million from
the ending balance)
Ø $39.9 million for state employee salaries (does not include Regents)
Ø $30.5 million to the Board of Regents for operations and transformation
Ø $30.0 million for the first installment of the five-year, $450 million
increase for teacher salaries
Ø $15.0 million for the first installment of the five-year, $225 million
increase for early childhood
Ø $10.0 million for Department of Corrections institutions including Fort
Madison
The Governor is also proposed $24.9 million in supplemental appropriations.
However, that does not include transferring $31.5 million of cigarette tax
revenue to Medicaid. The total for Medicaid between the general fund and
cigarette tax is $45 million. Other supplemental appropriations include $3.3
million to the Department of Corrections (including $1.3 million to staff the
perimeter towers in Fort Madison), $4 million for indigent defense and $2
million to the Regents to settle an insurance claim.
Ways
& Means Update
Bills introduced in committee this week:
HSB 502-An Act phasing out the state income tax on social security
benefits and on pension and retirement income and including effective and
applicability date provisions.
Bills passed out of
committee this week:
HSB 502-An Act phasing out the state income tax on social security
benefits and on pension and retirement income and including effective and
applicability date provisions.
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