State Deductions for Federal Income Taxes: A Step Forward in Iowa, a Standstill in Alabama

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At present, seven states (Alabama, Iowa, Louisiana, Missouri, Montana, North Dakota, and Oregon) offer state taxpayers some form of an income tax deduction for the federal income taxes they pay. This basically undoes, at least partially, the progressivity of the federal income tax. The upper-income taxpayers who pay more in federal income taxes receive the largest deductions on their state income taxes, even though they still have the greater ability to pay.

Efforts to limit or to repeal these deductions -- and to use the additional revenue to provide tax reductions for low- and moderate-income taxpayers -- have been underway in two such states. In Alabama, Representative John Knight has proposed legislation to pare back his state's federal income tax deduction in order to finance a sales tax exemption for groceries. Unfortunately, House Republicans may have successfully prevented further consideration of the bill this session, voting en bloc to keep it from coming before the House for debate.

Meanwhile, in Iowa, momentum is building for a plan that would repeal the deduction outright while also lowering tax rates across the board and increasing a pair of tax credits. House Speaker Pat Murphy recently voiced his support for the changes and the Senate seems poised to act as well.

For more on efforts in Alabama and Iowa to improve tax fairness, see the web sites for Alabama Arise and the Iowa Policy Project.

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