All bills passed by the Legislature and sent to the Governor for her signature during the 2018 session.
SF 2388 – Ending central assessment of telecommunication property; transfer to local assessment and valuation
SF 2389 – DNR authority to set pricing for camping and rental fees
SF 2390 – Food safety and hotel sanitation fees and inspections
SF 2400 – Local government risk pools
SF 2407 – Knoxville Raceway sales tax rebate update
SF 2417 – GOP tax scheme
HF 631 – Hunting and fishing fee increases
HF 2370 – Post-adoption information
HF 2446 – Utilities Board omnibus/voice over the internet protocol service regulations
HF 2478 – Exempt sales tax for construction equipment purchased for lease or rental
HF 2500 – Workforce housing deadline extension
SF 2388 would eliminate the current system for assessing telecommunication facilities that applies to wire-line telephone and Internet service providers and replace it with a traditional assessment process on a local basis. Wire-line service providers have been centrally assessed by the Department of Revenue on a number of factors to determine the value. The property includes wires and other transmission equipment. The property tax paid is distributed proportionally to the jurisdictions where the transmission infrastructure is located. The bill modifies cable television property assessment so that it is valued in the same manner and on comparable property as wireless and wire-line telecommunications companies under the legislation.
Telecommunications property will be locally assessed with the valuation limited to the value of real property associated with the utility. This new procedure is projected to lower the taxable valuation of telecommunications property by an estimated $885 million and reduce property taxes to local governments by nearly $30 million. The tax reduction has a three-year phase-in, which is accomplished by providing an additional exemption under the central assessment system before transitioning to the local system for assessments after January 1, 2022.
Under the bill, cell towers are not considered telecommunications property and will not be assessed under Chapter 433. Cell towers are assessed locally as real property. However, the bill does provide a phase-out of property taxes on cell towers.
SF 2389 would give the Department of Natural Resources (DNR) authority to adjust fees for campsites, cabins and other facilities in state parks and management areas. The department previously established fees through the administrative rulemaking process, which can take more than six months. Under SF 2389, DNR will set rates for campsites, including offering package deals and discounts, to more effectively market the sites.
SF 2390 changes food safety and hotel sanitation fees and inspections based on recommendations from the Department of Inspections and Appeals (DIA), Department of Public Health (DPH) and regulated establishments, including restaurants, schools, hotels and banquet facilities.
The food inspection program was designed to be self-supporting with fees covering the costs of the program. This allowed local governments to run programs and provide services at a local level. Without a fee increase, local governments haven’t been able to afford the program, so more responsibilities shifted to the state. The fee increase will allow more local governments to resume inspections. Fee increases don’t apply to schools and licensing requirements don’t apply to education events with food vendors.
SF 2400 allows library districts to participate in the Iowa Community Assurance Pool (ICAP), a local government risk pool. The bill also updates Iowa law for townships, 28E organizations, emergency management agencies, empowerment boards, transit authorities and county fairs to provide allow them the same coverage under the risk pool as cities and counties, including coverage against employee theft.
SF 2407 updates the existing sales tax rebate for improvements at Knoxville Raceway by simplifying the process for claiming the rebate and changing the maximum rebate to $1.8 million (instead of 25 percent of project costs or a maximum of $2 million).
SF 2417 – GOP TAX PLAN
Overall tax bill impact
The Republican tax plan is a major transformation of Iowa’s tax system that will eventually reduce revenues by more than $1 billion annually.
Lower revenues initially come from reductions in individual and corporate tax rates, along with expanded expensing deductions for farmers and small businesses and a new tax deduction for most businesses organized as LLCs and S-corporations. We’ll see even greater reductions in the future when the plan changes what income is subject to tax for individuals and major reductions in the top tax rates. The bill also expands Education Savings Accounts for private K-12 education expenses, expands Iowa’s sales tax to more online sales, and makes a number of changes to existing tax credits.
These tax cuts will cripple Iowa’s ability to train more skilled workers, to increase family incomes and to help create more opportunities for our children and grandchildren. Iowa will be in a state of constant budget crisis, with state resources decreasing over time.
This bill reduces general fund revenue by more than $100 million in FY19 and by more than $261 million in FY20. In tax year 2024, the bill is projected to reduce individual and corporate income taxes by more than $1 billion.
Reduced revenue will lead to cuts in state spending on many programs, which may in turn increase local property taxes. More school districts will be subject to the “budget guarantee” and will be forced to rely on local property tax increases to balance their budgets. Public safety and mental health service shortfalls will also fall on local governments and property taxes.
A portion of the revenue loss is made up by modernizing the state sales tax system to more effectively collect taxes for online purchases. The bill also expands the state sales tax to include digital goods and services, taxis and ride-sharing companies, and room rental services (VRBO and Travelocity). It also changes the definition of “manufacturer” to overturn an Iowa Supreme Court decision (Sherwin Williams). The net impact of sales tax changes in the bill is around $67 million in FY19 and $117 million in FY20.
Business tax credit changes are projected to have a minor impact on overall revenues in the near term. The limitations on who can claim the Research Activities Credit and “base year” calculations will reduce awards through the program, but not substantially. The bill does include a five-year extension to the deadline for certifying qualified investment funds under the Innovation Fund program and a one-year extension to the Targeted Jobs Withholding Tax Credit program in certain cities (i.e., Sioux City, Council Bluffs, Burlington and Fort Madison).
The bill also eliminates income tax credits that supported geothermal energy system installations. This program has created jobs across the state and supported renewable energy and energy efficiency improvements to homes, farms and businesses.
Individual income tax changes
Initially, the income tax changes in the bill will:
- Leave the existing income tax system and brackets in place but will reduce the rates for tax year 2019.
- Couple Iowa’s tax code with the federal changes that expand the Earned Income Tax Credit and teaching expense deductions for tax year 2018.
- Phase in increases for Section 179 expensing. For tax year 2018, the limit is raised to $70,000/$280,000 annually for individual income taxes only, not corporate. The bill also institutes a K-1 tax form “fix,” which means the limit on expensing is extended to every member of a business rather than having all partners cumulatively limited to the expensing threshold. Additionally, the legislation does not couple with federal changes that eliminated “like-kind” exchanges from qualifying under Section 179. Those exchanges and the K-1 “fix” will end in tax year 2020. A K-1 is the form that reports the amounts that are passed through to each party that has an interest in a small business entity.
- Expand qualifying education expenses for 529 savings plans to include private K-12 education beginning in tax year 2018.
- Provide for general individual and corporate tax code coupling for tax year 2019. Section 179 expensing increases to $100,000/$250,000 for individual and corporate returns.
- Include the new qualified business deduction (QBID), which provides businesses that file under the individual income tax system (LLCs, S-Corp, partnerships, etc.) a major new deduction on federal income taxes. This deduction is equal to 20 percent of the qualified income from the business. The deduction is phased in over four years beginning in tax year 2019.
- With the QBID, individuals can deduct 20 percent of “qualified business income” from a partnership, S corporation or sole proprietorship, as well as 20 percent of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends and qualified publicly traded partnership income.
- Fully couple Iowa’s tax code with federal tax changes for tax year 2020, and automatically couple Iowa’s tax code with federal changes in the future. Previously, Iowa only coupled with federal tax changes by passing legislation to implement the changes.
- Not couple Iowa’s tax code with “bonus depreciation” provisions. Iowa has routinely not coupled with this provision.
Beginning in tax year 2023, the bill could change Iowa’s individual income tax system dramatically, assuming two conditions are met: 1) General fund net receipts for FY22 (or after) exceed $8.31 billion; and 2) Net general fund receipts grow at least 4 percent above the year prior (equal to or more than 104 percent of previous year’s net receipts).
- The basis for determining Iowa taxable income will be calculated on federal taxable income. This will incorporate all federal tax deductions into the Iowa tax code.
- Many of the Iowa specific adjustments to taxable income are eliminated. A summary of those adjustments is below.
- The state standard deduction is removed. The federal standard or itemized deductions will be factored into the tax code by using federal taxable income as the base.
- A new deduction for businesses is created for payments on the principal or interest of a qualified education loan incurred by an employee.
- Federal deductibility is eliminated, brackets are reduced and rates for tax year 2023 are lowered.
- The individual alternative minimum tax and the associated credit are repealed. This tax is paid by a small number of filers who can then get a credit for the tax paid in later years if the Alternative Minimum Tax is in excess of tax liability.
Corporate income tax
Tax rates for corporations will be reduced beginning in tax year 2021:
- The 50 percent federal deductibility provision in Iowa’s tax code is eliminated.
- Iowa’s tax code will fully couple with federal tax changes for tax year 2020, and automatically couple with federal changes thereafter. Currently, Iowa only couples with federal tax changes by passing legislation to implement the changes.
- Iowa’s tax code will not couple with “bonus depreciation” provisions. Iowa has routinely not coupled with this provision.
- The corporate Alternative Minimum Tax is repealed.
The bill makes many changes to tax credits and tax incentives. These include:
- Revising the Taxpayer Trust Fund and eliminating the Taxpayer Trust Fund tax credit. The fund is revised to hold money from “excess revenues” and be available to finance future tax policy changes, including, but not limited to, increasing the general retirement income exclusion or reducing tax rates. The fund has received money when general fund revenue exceeds REC estimates, up to $60 million. The bill eliminates the cap on transfers.
- The Taxpayer Trust Fund tax credit has been issued twice since it was created in 2013. Tax credits are issued only when the fund has a balance in excess of $30 million.
- Extending the Targeted Jobs Withholding Tax Credit by one year. The program was to expire June, 30, 2018.
- Providing a five-year extension for certificating a qualified investment fund under the Innovation Tax Credit program.
- Placing a number of restrictions on the use of Research Activities Credits by:
- Specifying industries that can claim the credit. Eligible businesses are in manufacturing, life sciences, software engineering, or aviation and aerospace.
- Prohibiting those in agricultural production, commercial and residential repair and installation, including HVAC, plumbing, security and electrical systems, from claiming the credit.
- Restricting the state credit to businesses that also claim and are allowed the federal RAC credit.
- Prohibiting a business from receiving a refund or carrying forward supplemental RAC credits issued under the High Quality Jobs Program.
- Defining “base amount” to determine expenditures a business can claim under the program. This is meant to restrict the base amount to what was intended by the original legislation.
- Repealing the alternative minimum tax credit, which is unnecessary with the repeal of the AMT, and providing for transition period.
- Expanding student eligibility for tuition grants under the Student Tuition Organization tax credit program. The threshold for eligibility is increased from 300 percent of the federal poverty level to 400 percent of the federal poverty level. The tax credit program cap is increased by $1 million to $13 million annually for tax year 2019.
- Repealing the geothermal heat pump tax credit beginning in tax year 2019.
529 plans – Education Savings Account expansion
The bill incorporates the recent federal expansion of qualified expenses under 529 college savings plans to include private K-12 education expenses. Maximum contributions for this purpose are $10,000 annually.
The 529 saving plan was established to encourage savings for higher education with contributions limited to $3,000 per year. The plans are invested in qualified securities and are designed to accumulate value while a child ages in order to pay for college. This new method will allow payment of expenses in the same year, essentially creating a tax deduction for private education expenses.
The main provisions of this portion of the bill provide for collecting sales taxes on Internet purchases by Iowans by expanding what is considered the nexus of the sale to include sales sourced to a person located in Iowa. Previously, nexus was restricted to the physical location of the seller; sellers located outside of Iowa were not obligated to collect and remit sales taxes. This issue is the subject of a case argued before the U.S. Supreme Court in April 2018.
The bill also makes digital products and information services subject to Iowa’s sales and use tax. This extends the tax to digital downloads of movies, music and books, as well as software. Information services include such streaming services as Netflix and Hulu, such genealogical research services as Ancestry.com, and other services that involve sending digital information to an end user. The Department of Revenue has asserted that such streaming television services as Netflix and Hulu are already subject to state sales tax requirements that apply to cable video services.
The bill extends the sales tax to taxi services and ridesharing platforms, and creates exemptions for public transit, paratransit, and emergency and nonemergency medical transportation
The bill expands sales taxes to services that facilitate the rental or use of lodging and automobiles. This would require ridesharing companies like Uber/Lyft, AirBnB/VRBO and others that assist in these transactions to collect and remit sales taxes. These companies are jointly liable for taxes owed on services they assist in accommodating. This means such booking services as Travelocity are liable for taxes owed on hotel rooms reserved using their platform in the event the hotel does not remit the taxes owed to the state.
The bill restricts a “manufacturer” to standards in force prior to an Iowa Supreme Court decision in a case involving Sherwin Williams. This eliminates many businesses from claiming the manufacturer exemption from sales tax on purchases of equipment and scales back Iowa’s sales tax exemption on manufacturing equipment.
Local Option Sales Tax (LOST) Election Approval changes
The bill strikes provisions in state law for LOST elections conducted in Polk and Johnson counties after January 1, 2019. Existing law requires contiguous cities to vote to approve the implementation of a LOST. This provision makes cities such as Des Moines, West Des Moines and others in metro ineligible to implement LOST, even if the city’s voters approved the measure.
Miscellaneous Administrative changes for the Department of Revenue
The first three divisions of the bill contain a number of administrative changes proposed by the Department of Revenue. These include:
- Establishing consistent interest accrual procedures across tax types administered by the department.
- Expanding tax fraud penalties beyond credits and refund claims to include reimbursements, rebates or other payments.
- Providing the department the authority to share information with the Attorney General’s office and law enforcement in cases of suspected tax evasion.
- Codifying a recent Iowa Supreme Court (Bass v. JC Penney Inc.) ruling regarding class actions and private right of actions for overpayment of taxes collected by a private entity. LSA legal update on the case.
- Dictating that the department will be the point of contact on behalf of political subdivisions and the state to ensure accurate geographical boundary information is provided to the U.S. Census Bureau.
- Improving the procedure for collecting the prepaid wireless service excise tax and the water service excise tax.
- Providing that political checkoff funds received by Revenue will be deposited into the General Fund. The checkoffs were eliminated last year but some amended returns are being submitted with money set aside for the checkoff.
Changes to Individual Income tax adjustments
The bill changes existing deductions for calculating Iowa taxable income:
- The cost of purchasing health insurance for a spouse or dependents (only impacts Iowans taking the federal standard deduction). The adjustment will remain, but it is limited to Iowans 65 and older with incomes less than $100,000 who purchase health insurance for their spouse or qualified dependents.
- Net capital gains deduction, including the 50 percent deduction for capital gains associated with a qualified Employee Stock Ownership Program. The new capital gains deduction is limited to farm real estate transactions only. The deduction is available for transfers of real estate to lineal relatives as well as two levels of consanguinity, which includes brothers and sisters and their children. Provisions attempt to prevent using this qualified transaction as a way to avoid paying capital gains taxes by transferring the property to a qualified relative who then sells the property to a non-qualified person.
The bill eliminates or phases out these deductions for calculating Iowa taxable income:
- Employment of disabled individuals and former prisoners
- Organ donation
- Restitution/compensation for property taken through involuntary condemnation/eminent domain
- Income earned by non-residents who conduct emergency response work for utilities in the event of a disaster
- Tax expenses for a fiduciary in executing an estate
- Restitution for Agent Orange exposure, those kept in Asian-American internment camps during World War II and those victimized by Nazis
- Income earned during active duty in Desert Storm, Bosnia-Herzegovina peace keeping and the second Iraq war
The bill appears to remove income from these provisions in calculating Iowa taxable income:
- Certain intangible drilling and development costs described in IRC §57(a)(2).
- The percentage depletion amount with respect to certain oil, gas or geothermal wells described in IRC §57(a)(1).75
- The depreciation taken on a speculative shell building, defined in Iowa Code section 1(27), that is owned by a for-profit entity receiving the proper tax exemption, unless the taxpayer is not using the building as a speculative shell building. For state income tax purposes, depreciation is computed and subtracted from federal adjusted gross income as if the building was classified as 15-year property.
HF 631 would give the Department of Natural Resources (DNR) authority to establish fees for hunting and fishing licenses and permits. The fees had been established in Iowa Code and could only be changed through legislation. Now, the Natural Resources Commission (NRC) can set fees through administrative rulemaking.
Hunting and fishing fees are deposited into the Fish and Game Protection Fund. This fund is constitutionally protected; it can only be used to regulate or advance fishing, hunting and trapping in Iowa, and to administer programs that protect, restore and manage fish or wildlife. In the past, fees did not keep up with the department’s costs to provide services. That led to cuts to conservation law enforcement staff and projects to improve wildlife habitat and recreational opportunities.
As passed by the Legislature, a person issued a youth deer-hunting license with an unused tag can hunt in other deer-hunting seasons. A youth hunter can only use the approved “method of take” or weapon during that season.
HF 2370 requires the State Registrar of Vital Statistics to send a list of available post-adoption services to adoptive parents, along with the new birth certificate. The list of services is to be provided by the Department of Human Services.
HF 2446 clarifies and updates Iowa Code by deleting references in Utilities Board regulatory sections that are obsolete and repeals requirements for studies that have been completed and the reports properly filed with the Legislature. In addition, two Utilities Board orders that establish regulations for voice over the internet protocol (VoIP) phone service are put into Iowa Code.
HF 2478 clarifies that leased or rented construction equipment is not subject to sales tax when it is resold by the retailer who was renting or leasing the equipment.
HF 2500 allows the director of Iowa’s Economic Development Authority to grant an extension of up to one year for completing projects awarded credits under the Workforce Housing program. Projects were to have been completed within three years of registration, but some projects were in danger of missing their deadline.