Preferential Treatment (and other letters)

Kurt Johnson of Urbandale writes to the Des Moines Register about how unfair it would be to 401K and IRA investors if the state legislature eliminated income taxes only on pensions:

If the Iowa Legislature eliminates income tax on pensions, then it must make sure to also do the same for 401(k)s and IRAs. The only difference between pensions and 401(k)s and IRAs is who put the money in (employers vs. employees) and who has held the money (companies vs. other financial institutions.)

Generally, pensions allow for a larger monthly benefit than 401(k)s and IRAs. People with pensions have generally worked for government or large employers and have generally received higher pay and more generous benefits during their working lives. People with 401(k)s and IRAs have generally worked for smaller employers or have been self-employed.

It would be clearly unfair to give preferential treatment to pensions over any other type of retirement plan.

I think Kurt has an excellent point here and I'd be curious to know what tax professionals, like Joe @ Roth CPA, think of this angle. Even though Iowa is loaded with seniors, probably not that much revenue is raised by the State taxing income from 401K and IRAs distributions since these retirement programs haven't been around that long, relative to pension plans and Social Security that is.

UPDATE: Joe @ Roth CPA followed up with this excellent post.
John Laflen of Buffalo Center writes about this issue in the Register:

I applaud the interest in improving the tax system. I do not support the measure to eliminate state taxes on pension income. The tax system must be fair, and elimination of taxes on pensions would be unfair to those who are retired and don't live on pensions.

I live mostly on a U.S. government pension. This pension income, minus the amount I paid in, is taxed by the state and federal government. I believe it is similar for Social Security income. My pension is taxed as if I were employed. The proposed changes, as I interpret them, would eliminate my paying state taxes on this income.

Why should I have different rules than those that would apply to my mom and dad if they lived in Iowa? My father is a farmer who invested in land while he was farming. When he retired, he rented some of his land, has some in government programs and has a small cow-calf enterprise. He and Mom live on the rent and the other income (which includes Social Security), which is fully taxed.

The way I see it, Mr Laflen's parents have chosen to stay employed. Instead of being farmers, they've chosen to become landlords. They're not retired. They're still running a business and deserve to be taxed on that income, regardless of their ages.

Supposedly people who rent out land or property can put it into a self-directed IRA, but this is a fairly recent change. Traditional IRAs have only been around since 1982, so I suppose that we should just be thankful that the popularity of this excellent way to save, tax-deferred, until age 70 1/2, continues to evolve.

Wayne Woodworth of West Des Moines adds this in the Register:

In particular, flat taxes or national sales taxes are very likely to be disproportionately harsh on the low- and middle-income earners. So if we made the Iowa tax a percentage of the federal tax bill in either of those scenarios, we would simply create a double whammy on these taxpayers.

This is typical of people who want to distort or outright lie about "flat tax" options. Steve Forbes wanted a 17% flat tax on income, but it would be on anything above $36,000 a year for a family of four. When you leave that part of the equation out you're really being disingenuous.