TAX REBATE could fatten a few state coffers

Wednesday, June 6th 2001, 12:00 am

By: News On 6

DES MOINES, Iowa (AP) _ When taxpayers in Iowa, Oklahoma and seven other states get their federal rebate checks this summer, they may have to turn around and give some of the money back to the government.

Nine states have laws making the rebates subject to state income tax. The laws _ designed to give taxpayers a break _ let people deduct federal tax payments from their state tax liability. So when those payments go down, the liability goes up.

``I'm outraged by it, but I'm not surprised,'' said Oklahoma City taxpayer David Dank. ``The whole state system is totally out of whack.''

The other states in question are Alabama, Louisiana, Missouri, Montana, North Dakota, Oregon and Utah, according to the Federation of Tax Administrators.

Just how the states would get the money remains unclear.

In Iowa, where the taxpayer would have to pay $14.57 on the average federal rebate of $291, legislative leaders plan to discuss the issue this month during a special legislative session called previously to vote on a redistricting proposal.

Proponents of making the rebate tax-exempt in Iowa say they are simply trying to get more money back to consumers, the sort of economic stimulus envisioned by the tax rebates.

``By allowing people to keep this money, they'll likely spend it, giving Iowa businesses a $400 million shot in the arm,'' House Speaker Brent Siegrist said.

Iowa Gov. Tom Vilsack said he wants more study before deciding what to do.

Under the $1.35 billion tax cut package President Bush is getting ready to sign, single taxpayers will get a rebate on this year's taxes of up to $300, while couples will get a rebate of up to $600.

The money would help the coffers in the nine states, but that wasn't much consolation to some taxpayers.

``I've given it to them once. I don't think they should give it back to me and then tax me on it,'' said Kaye Lozier, a secretary from West Des Moines.

Rowena Alexander, who works at a Home Depot home improvement store in Kansas City, was expecting a full $300 rebate.

``It's supposed to be a gift, I would think,'' she said. ``And now they're going to put a tax on it? But I'm not surprised. I figured there had to be a catch somewhere.''

``It's not that big a deal,'' Des Moines secretary Joni Klaasen said of the $14.57 that would go to the state.

But multiply $14.57 by the number of taxpayers in Iowa _ officials estimate the state's taxpayers will get $404.9 million in rebates _ and the state could get a windfall of more than $20.2 million.

Paula Ross of the Oklahoma Tax Commission said the state income tax liability on an average federal rebate will be only about 2 percent or 3 percent.

To Judy Denwalt of Oklahoma City, ``it would be minimal compared to the $300.''

``I think along the lines of what it means for my children,'' Denwalt said. ``I think it's going to help a lot.''

Outside of Iowa, the issue hasn't gotten much attention.

``Maybe politicians are keeping quiet about it because they realize it is a revenue enhancement,'' said Jim Lopach, a political science professor at the University of Montana. ``States were looking at surpluses, but now they're looking at restricted revenues.''

Bob Adams, a spokesman for the conservative-leaning American Legislative Council, said he thinks people in some of the other states haven't caught on to what's happening.

``I don't think it's gotten up on the radar screen yet,'' Adams said.

Ed Renwick of the Loyola Institute of Politics in New Orleans said the effect on taxpayers would be so tiny it made no sense to fight about it.

``They're going to have a big political fight over $12? That's unbelievable,'' he said.

Some taxpayers just want the checks in the mail.

``I just want my rebate, and I don't care if it's taxed or not,'' said Des Moines lawyer Joseph Royce.