DES MOINES — Jobless Iowans, disaster victims, teachers and others will have money on the line when Gov. Chet Culver and state lawmakers wrestle with a taxing issue in the coming weeks.

Tens of millions of dollars are at stake for Iowa taxpayers and the state treasury over a decision whether to “couple” Iowa tax rules with federal tax code changes. The first signal on where a decision is headed could come when Culver issues his fiscal 2011 budget plan to the legislature next week.

The already-complex and vexing coupling issue — still unresolved from the 2008 tax year — is further complicated because state government is beset by shrinking revenue and an unprecedented budget gap forcing cost-cutting measures that reduce the likelihood of providing relief for targeted taxpayers this session, officials said.

“We’re going through some really tough decisions in state government, and additional things that cost big piles of money aren’t likely to happen,” said Senate Majority Leader Mike Gronstal, D-Council Bluffs.

The issue dates back to last session when Democrats who control the legislature decided not to adopt for state tax purposes a list of 2008 federal tax changes offering deductions, exemptions or other advantages for such things as disaster-related expenses, business equipment depreciation, education-related expenses, college tuition and fees or certain sales tax charges. The coupling issue at that time carried an estimated state budget effect topping $50 million.

But the decision was not final until the legislature adjourned in late April — meaning tax preparers and taxpayers were given mixed signals with some early-filing Iowans incorrectly claiming the federal benefits on their 2008 state returns while others did not, said Jim McNulty of the state Department of Revenue.

After that, some taxpayers were contacted by their tax preparers that they might owe additional state tax or face returning part of any state tax refund they received for claiming federally adopted tax breaks that were not approved for state tax purposes.

However, Culver stepped in and directed state revenue officials to delay enforcement against taxpayers who claimed disaster-related credits on their state tax returns until the issue could be addressed this session.

In the meantime, Congress adopted additional 2009 federal tax changes that exempt the first $2,400 in unemployment compensation for jobless workers from taxation, allow educators to deduct up to $250 in out-of-pocket expenses and make other changes that Culver and Iowa

lawmakers again must decide whether to adopt for state tax purposes.

The state tax code update legislation — Senate Study Bill 3042 — proposed by the Iowa Department of Revenue would conform the federal tax changes for the 2009 tax year but not make any retroactive provisions for 2008. McNulty said the price tag associated with the coupling issue would be less than last year “but it will still be significant.”

If lawmakers and the governor decide not to couple again this year or address the 2008 issues, McNulty said, state tax collectors would begin contacting taxpayers who may owe the state money for disallowed tax breaks they may have claimed on last year’s Iowa returns.

“There’s no question it’s a confusing and complicated issue,” said McNulty, who estimated that a minority of Iowa’s 2008 income-tax filers would be affected by the 2008 coupling outcome.

“It’s just a mess,” said Sen. Randy Feenstra, R-Hull.

“It’s got to be cleaned up. It’s just that when you clean it up, it’s going to directly affect the disaster relief victims and others,” he added. “It is going to add insult to injury to those flood victims who took the deduction.”

Rep. Tyler Olson, D-Cedar Rapids, introduced legislation — House File 2088 — last week that would waive any penalties and interest against taxpayers who filed a state return expecting Iowa would conform with federal income tax provisions. The bill applies only to disaster-related losses, but Olson said it could be amended beyond its initial scope.


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