Governor Terry Branstad released details from his 2011 tax return late last week. His income was down considerably from 2010 to a little more than $190,000. That’s still nearly four times the median household income in Iowa and puts Branstad in the top 5 percent of Iowa households by income level. The bulk of his income came from the salary for being governor ($116,131) and pension payments from his previous service in state government ($52,954).

Branstad’s tax bill was a bit of a head-scratcher: $17,777 in net federal taxes but only $52 in state taxes for 2011. Most Iowans pay way more than $52 in state taxes on income way below $190,000. Even more surprising, last year Branstad received a $369 refund on his state tax return despite reporting $313,663 in adjusted gross income during 2010.

The governor’s tax bill illustrates the inequities in Iowa’s tax code and the need for a more effective alternative minimum tax.

Radio Iowa published these details provided by the governor’s office on April 20:

2011 salary as governor $116,131

IPERS pension $52,954

IRA distribution $6,000

Capitol gains $7,234

Net 2011 federal taxes paid $17,777

    (Payments: $32,083; Refund: $14,306)

Net 2011 state taxes paid $52

    (Payments: $9,976; Refund: $9,924)

2011 charitable contributions $25,458

    (13.4 % [adjusted gross income])

I know that charitable contributions are tax-deductible, but I was puzzled by how Branstad got to a position of owing $52 in state taxes on adjusted gross income of $190,000. Democratic State Senator Rob Hogg provided more details from a document that’s not available online, so I don’t have a link.

Branstad was able to deduct $62,831 last year because he paid that amount in federal taxes for 2010 (view that return here). Iowa is one of only three states that allow full “federal deductibility,” which means whatever you pay in federal income taxes can be subtracted from the income number used to compute your state taxes.

About $12,000 of Branstad’s IPERS income was also eligible for deduction, as was about $11,000 he contributed to 529 funds for his grandchildren’s college education.

Branstad also had a passive investment loss of $41,585 for Liberty Banshares Iowa, Inc. That’s not a check he had to write–that’s a loss of value on paper from a previous investment. He was able to subtract that loss from his taxable state income.

So, $25,458 (charitable gifts) plus $62,831 (federal taxes) plus $12,000 (deductible IPERS income) plus $11,000 (529 contributions) plus $41,585 (passive investment loss) equals $152,874 to deduct from Branstad’s taxable state income. That still leaves close to $40,000. Perhaps the governor had some other tax-deductible expenses. Still, most Iowans earning $30,000 to $40,000 per year year are paying a lot more than $52 in state income taxes.

Lynn Campbell reported some details from Branstad’s 2010 tax return last April. Branstad’s $369 state tax refund for 2010 was linked to a similar chain of deductions. Although his adjusted gross income of $313,663 (including $141,417 in business income) was quite high in absolute terms, it was lower than Branstad’s 2009 income. He was able to deduct his federal tax payment and $44,591 in charitable contributions. His $68,050 distribution from an Individual Retirement Account was tax-exempt income. And so on.

Taken individually, many of the deductions that benefit Branstad are logical. Without tax incentives for charitable donations, non-profit organizations would struggle. It makes sense for the state to allow a portion of pension income to be tax-exempt, and to reward people who save for a college education.

But viewed as a whole, Branstad’s tax returns underscore inequities of our state’s tax code. Anyone who can afford to donate more than $44,000 to charity in 2010 and more than $25,000 to charity in 2011 should pay something to keep state government running. Anyone who has enough disposable income to put five-figure sums into grandkids’ college savings funds should pay something to keep state government running.

Branstad’s tax bill looks like a textbook case for an alternative minimum tax. I have heard of the federal alternative minimum tax but learned only this week that Iowa has something similar on the books. Click here to read the relevant portion of the Iowa code, but be warned: unless you are an accountant or tax attorney, you may find the wording confusing. I didn’t understand why Branstad’s taxable income wasn’t covered by this provision of the code. It looks like “all taxable income exceeding thirty thousand dollars but not exceeding forty-five thousand dollars” is taxable at a rate of “seven and ninety-two hundredths percent.” That’s more than $52.

Jim McNulty, program manager in the Iowa Department of Revenue’s policy and communications division, explained some of the details on Iowa’s alternative minimum tax by telephone on April 25. In effect, people calculate their tax bill twice: once under the regular rules, and once under the alternative minimum tax. They pay the higher of the two numbers. If the alternative minimum tax works out to zero, they pay the number calculated the other way. (I assume that’s what happened for Branstad on this year’s and last year’s tax returns–he was not subject to the alternative minimum tax.)

McNulty explained that Iowa’s alternative minimum tax is piggybacked onto the federal alternative minimum tax, so anything that isn’t added back to your taxable income for federal purposes (i.e. charitable donations) also isn’t added back for Iowa tax purposes. Moreover, tax deductions that are specific to the Iowa code are not added back when calculating taxable income. That means Branstad wouldn’t have to add back to his state taxable income any money he paid into 529 funds, the tax-exempt portion of his IPERS income, the federal tax payment he deducted, and so on.

Furthermore, Iowa’s alternative minimum tax allows an additional exemption which varies in size, depending on whether the person is single or married, filing jointly or separately. Married couples filing jointly can exempt up to $35,000 before calculating any alternative minimum tax payment, McNulty explained (see 422.5 2 b (2) (c)). So if Branstad’s various deductions and passive investment losses brought his 2011 state taxable income down below $35,000, he could exempt that whole amount and owe nothing in alternative minimum tax for last year.

Senator Hogg took to the Iowa Senate floor this week to decry Branstad’s tiny state tax payment. From his press release of April 23:

DES MOINES – State Senator Rob Hogg today urged the Iowa Legislature to consider a “Branstad Rule” to make Iowa’s state income tax system more fair.  Over the weekend, Governor Branstad reported that he only paid $52 in state income taxes in 2011 despite an income of more than $190,000.

In a short statement on the floor of the Iowa Senate, Senator Hogg encouraged Iowans to compare their income and state income taxes with Governor Branstad’s.  A one-minute video of his comments is available by copying and pasting this link into a web browser: http://youtu.be/5fuUAhVVWYE

“The fact that Governor Branstad only paid $52 in state income taxes while earning more than $190,000 shows that our state income tax system is unfair,” Hogg said.  “It is wrong that a person making $190,000 a year pays less income tax than most Iowans earning between $30,000 and $40,000.”

According to the Iowa Department of Revenue, the average tax bill for people earning between $30,000 and $40,000 in adjusted gross income was $1,008.

Last year, Governor Branstad twice vetoed an increase in the earned income tax credit for working families.  “Governor Branstad paid less state income tax than most working families who would have benefited from the earned income tax credit that he vetoed,” Hogg said.

Like the proposed national “Buffett Rule” to make sure millionaires pay as much federal income tax as their secretaries, Hogg called for a “Branstad Rule” to make sure taxpayers like Governor Branstad contribute at least as much to schools and public safety as working families.

In further communication with me by e-mail, Hogg suggested that Iowa’s alternative minimum tax should become more “meaningful,” so that above some income level, perhaps $150,000, Iowans would “have to pay at least one percent of their income in state taxes.”

That sounds more than fair to me. If Branstad had enough cash to make tens of thousands of dollars in tax-exempt payments during 2011, it’s not unreasonable to ask him to chip in around $1,900 to help fund education, roads, and all the other services state government provides.

Branstad’s return also makes a strong case for ending or limiting federal deductibility, which economic Dave Swenson has called an “archaic holdover.” Research has shown that this portion of the tax code disproportionately benefits the wealthiest taxpayers. From a 2009 report by the Iowa Fiscal Partnership:

As the ITEP [Institute on Taxation and Economic Policy] report notes, Iowa is one of only six states offering a deduction for federal income taxes paid – and only three including Iowa offer full deductibility. This feature does not help low- income Iowans and offers the greatest benefits to the highest-income people.

The ITEP report, which examined household tax impacts in all states, notes that fairness of state taxes is determined by two factors: the mix of tax types, and the structure of each tax.

“In the 10 most regressive states, a telling feature is that six have little or no income tax, two have a flat-rate income tax, and two have a low top rate,” [Iowa Policy Project research director Peter] Fisher said. “That means the wealthiest taxpayers, those who are doing quite well in or out of a recession, are receiving a big break at the expense of other taxpayers, or of lost public services.

Unfortunately, ending federal deductibility is a non-starter in the Republican-controlled Iowa House, and Branstad strongly opposes changing that part of the tax code. Democratic Governor Chet Culver was on board with ending federal deductibility as part of a broader tax reform that would have lowered taxes on most middle-income Iowans. However, when state lawmakers were working on that package in 2009, Democratic leaders of the Iowa House couldn’t find 51 votes for eliminating federal deductibility.

Share any relevant thoughts in this thread.

UPDATE: Branstad answered a question related to his income in the April 27 edition of “Ask the Gov.” Click here to watch the video. My partial transcript begins around the 2:11 mark:

Branstad: Our next question comes from BD via Twitter. BD asks, “What would you have done with the extra $130,000 had you not taken the pay cut to run for governor again?”

Well, first of all, I’m proud to have the honor of serving again as governor. I knew full well it was gonna pay a lot less than being president of Des Moines University, but I enjoy the challenge and the opportunity to serve the people of Iowa. I would have probably just invested that money, so I can certainly live on the salary that I receive as governor, and I’m just honored and proud to have this opportunity to serve the people.

Based on Branstad’s last two tax returns, I’m guessing he would not have invested all of that extra money. He would have used part of it on deductible expenses or contributions in order to bring his total state tax burden down to zero.

A better question to ask the governor would be, “Do you think it’s fair for any Iowan living comfortably on a six-figure income to pay virtually nothing into the state budget?”