Supporters of a Democratic tax reform bill in the state legislature have begun pushing back against its detractors, trying to overcome several weeks of bad publicity that have put the measure’s future in doubt.

Senate Majority Leader Mike Gronstal discusses ending federal deductibility

Senate Majority Leader Mike Gronstal discusses ending federal deductibility at a press conference Thursday.

The bill would end federal deductibility, which allows state residents to write off their federal tax burden on their state returns, and it would lower state tax rates overall to make up the difference.

Democrats say the plan would result in a middle class tax cut and a more progressive tax code. Republicans say it takes away Iowans’ largest tax deduction and will result in higher taxes in future years, even if it results in less state revenue in the short term.

The conflict over the bill came to a head last week during a public hearing. Opponents, organized by the anti-tax group Iowans for Tax Relief, had to be removed from the House gallery after repeatedly ignoring demands to stop cheering and booing speakers during the proceedings.

Iowans for Tax Relief has also taken to the airwaves, launching a television advertising campaign calling the legislation a “tax on a tax.”

Much to supporters’ chagrin, the opposition has even controlled the language of the debate. While unveiling the bill, Democrats admitted that any change in the tax code would result in both “winners” and “losers.” Since then, conversation on the bill has focused on how many “losers” would be included in the final results.

One Democratic legislator who spoke on the condition of anonymity so he could speak freely, told the Iowa Independent that if the bill fails, “it will be because we let the other side control the terms of the debate.”

Now, however, Democrats and those who support the bill appear to be trying to counteract Republican pressure.

“We think Iowans will broadly support [the bill] once they understand the misinformation out there about this is greatly exaggerated,” Senate Majority Leader Mike Gronstal, D-Council Bluffs, said.

After delaying debate on the measure more than a week in order to tinker with the provisions, address concerns raised by critics and try to increase the total number of Iowans who would pay less in taxes, Democrats unveiled an updated tax reform plan earlier this week. It includes increased deductions and bigger tax breaks for college students. Nearly 75 percent of Iowa taxpayers would see either a tax decrease or no change at all under the revised plan, Democratic lawmakers said. The state’s top tax rate would drop from 8.98 percent to 6.98 percent and the Earned Income Tax Credit and the Child and Dependent Care Credit would be increased.

“We’re seeing pretty clearly that the majority of small business owners would benefit from the proposal now under consideration,” said Beth Pearson, research associate for the Iowa Policy Project, which released an analysis of the tax proposal this week trying to refute claims being made by opponents about impacts on businesses.

Pearson’s organization analyzed seven different scenarios for different income brackets — from a married couple family with two children with and income of $30,000 a year to a married couple with income of $180,000 a year — and concluded each would see their overall taxes reduced under the Democrats’ proposal. The analysis also shows an example of an entrepreneur with a $600,000 capital gain from the sale of a business, with no change in tax liability because of Iowa’s already substantial preferences for high-income individuals.

The most contentious part of the debate is ending federal deductibility. Opponents point to the fact that federal taxes on wealthy Iowans will increase when tax cuts signed into law by then-President George W. Bush are allowed to expire in 2011.

“Iowa taxpayers are tired of being bullied into paying more and more taxes,” Iowans for Tax Relief President Ed Failor Jr. said in a statement. “The net result of this bill over the next five years is a more than a $400 million tax increase on Iowans. How on earth is that a tax cut?”

If the federal government raises taxes, the amount deducted on Iowa taxes also increases, which lowers the amount of revenue the state brings in. Ending federal deductibility would get rid of this issue, but it would no longer shield Iowans from increased federal taxes.

Charles Bruner, executive director of the Child & Family Policy Center said many low- and middle-income families with children may pay no federal income tax due to the exemptions and deductions in the federal tax code. These families don’t benefit from federal deductibility because they don’t pay federal income tax. However, many of them do pay Iowa state income tax, and the proposed plan includes credits and a new standard deduction that will help them, he said.

Democrats are hopeful Iowans will see the plan as a way to make the state’s tax code more fair.

“We think the politics of cutting peoples taxes is a good thing,” Gronstal said. “But, we also think the unfairness of the current tax code, where the middle class carries more than its fair share of the burden, and especially at a time when the economy is weak, putting more dollars in the pockets of middle class Iowans is the right thing to do.”

For their part, Iowa’s Republicans see the debate over federal deductibility as an opening to retake state government in 2010. During a taping of Iowa Public Televisions “Iowa Press,” Republican Party of Iowa Chair Matt Strawn said the Democratic tax plan has gone a long way to unify a once fractured party.

“That fired up people that understand that you don’t raise taxes on people when you’re trying to get out of a recession,” he said.

One question that remains unanswered is another new portion of the bill — $55 million in additional tax breaks. The original proposal was revenue neutral. Now, in a year that has already seen massive budget cuts across the board, lawmakers will have to find a way to offset the cost of the new plan.

So far, no details on how they plan to do this have been released.

Debate on the tax plan could take place Tuesday or Wednesday.