A Democratic plan to overhaul Iowa’s tax system and end a deduction that allows residents to write off their federal taxes on state returns will go before the public at 7:30 p.m. tonight in what promises to be a contentious and heated hearing at the statehouse.

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The bill calls for the end of federal deductibility, a part of Iowa’s tax code that deducts federal taxes paid from a person’s adjusted gross income for state tax purposes. The effect is that income subject to state taxes is much lower, which in turn causes the state to institute a higher tax rate in order to generate enough revenue.

The House Ways & Means Committee approved the bill on a party-line vote Monday night.

Democrats plan to use the roughly $600 million that would be generated by ending the deduction to restructure the tax code and lower taxes for two-thirds of Iowans. Those making more than $125,000 a year would see a slight increase.

Supporters say the change would make Iowa’s tax system more fair and make the state appear more business friendly by lowering the top income tax rate from the current 8.98 percent to 6.98 percent. Opponents say it would increase taxes for thousands of small businesses, which they contend could hurt job growth.

House Minority Leader Kraig Paulsen, R-Hiawatha, said the real effect of the change would come in 2011, when federal tax cuts pushed through Congress by former President George W. Bush expire.

“When that occurs Iowans will have to pay state taxes on this increased federal tax burden,” he said. “The inability to use this deduction will result in Iowans paying approximately $125 million more in income taxes.”

But expiration of Bush’s tax cuts is also used as a reason to support ending federal deductibility. If the federal government raises taxes, the amount of money exempt from Iowa taxes is higher, said David Swenson, and economist at Iowa State University. Estimates from the Iowa Department of Revenue and Finance show Iowa losing $175 million a year in revenue beginning in 2011 if federal deductibility is kept in place.

“Eliminate deductibility, make the tax code simpler, and the issue goes away,” he said.

Supporters of the bill include Democratic legislative leaders; the Iowa Federation of Labor, AFL-CIO; the Child & Family Policy Center; and the American Federation of State County and Municipal Employees Iowa Council 61.

Opponents of the bill include Republican leadership; the Iowa Chamber Alliance; the Iowa Association of Business and Industry; the Iowa Family Policy Center; and Iowans for Tax Relief.

The editorial boards of state’s largest newspapers, The Des Moines Register and The Cedar Rapids Gazette, both endorsed ending the deduction over the weekend.

Iowa, Alabama and Louisiana are the only states that allow residents to deduct 100 percent of what they pay in federal income taxes from their state income taxes.