Division I – Removal of triggers for Contingent Income Tax System
This would remove the “triggers” that must be met to move to the contingent individual income tax system established under SF 2417 in 2018, and make the new system effective for Tax Year 2023. Under SF 2417, the contingent tax system only goes into effect after TY 2023 when two conditions are met: General Fund net receipts for FY22 (or after) exceed $8.31 billion; and net General Fund receipts for that year grow at least 4% above the year prior (equal to or more than 104% of previous year’s net receipts).
Under the contingent tax system, 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 and will eliminate many of the Iowa-specific adjustments to taxable income. The bill removes the state standard deduction but will bring federal standard or itemized deductions into the Iowa tax code by using federal taxable income as the base. One of the largest changes under the contingent tax system is the removal of the Iowa deduction for federal taxes paid, which is known as “federal deductibility.” This massive deduction has the impact of making Iowa’s income tax rates artificially high and appear less competitive with other states.
Division II – Child Dependent and Development Care tax credit expansion – This will increase the income threshold for taxpayers who qualify for the state tax credit from $45,000 to $90,000. This does not make any changes to those who are already eligible to claim the credit.
Division III – COVID grants tax exemption – This expands the tax exemption for COVID relief grants to other programs administered by the Iowa Finance Authority (IFA), Iowa Economic Development Authority (IEDA), and Iowa Department of Agriculture and Land Stewardship (IDALS) beyond the Paycheck Protection Program (PPP) that was included in legislation last year.
Division IV – PPP fix for fiscal filers – This will fix an issue with the Iowa income tax exemption for proceeds from a forgiven loan under the federal PPP. The language granting the exemption last session in SF 2641 was specific to taxes owed for 2020 and later. Since its passage, the federal government clarified the law to allow certain business expense deductions paid for using those loan proceeds. The language from SF 2641 inadvertently excludes fiscal year tax filers from the business expense provisions for loans they received during their FY19 tax year. The bill extends the business expenses deduction to those tax filers.
Division V – Capital gains/installment sales – This will account for the change in the treatment of capital gains under the current income tax system and the one that will be in place beginning in 2023. This allows for installment sales of capital that span the two types of systems to be treated as they were when the sale was initiated, instead of having the tax treatment change over the course of the installment sale.
Division VI – Inheritance tax phase-out and repeal:
This will phase out and repeal the inheritance tax in three years (the House proposal does this over an eight-year period). The Senate phase-out works by increasing the exemption amount and increasing the percent of the estate that is exempt from the tax:
- 2021: first $300,000 exempt and 25% untaxed
- 2022: first $600,000 exempt and 50% untaxed
- 2023: first $1 million exempt and 75% untaxed
- 2024: inheritance tax is repealed.
Division VII – Housing Trust Fund – This changes the amount of Real Estate Transfer Tax that gets deposited into the State Housing Trust Fund. Current law states that 30% of the Real Estate Transfer Tax receipts paid by county recorders to the State Treasure are transferred to the State Housing Trust Fund each fiscal year, with a $3 million cap limit. Moneys in excess of the cap are deposited into the General Fund. This bill increases the $3 million cap to $7 million (a $4 million increase).
Division VIII – High quality jobs (HQJ)/child care facilities – This allows additional points for businesses applying for HQJ tax credits if the facility will offer child care services for employees.
Division IX – Innovation/Angel tax credits – This will allow IEDA to adjust the annual allocations to Investment Tax Credits, otherwise known as Angel Tax Credits, and Innovation Fund Tax Credits under the existing $10 million cap for the two programs. Currently, Angel Tax Credits are limited to no more than $2 million annually, and Innovation Fund Investment Tax Credits are limited to no more than $8 million. The bill gives IEDA flexibility to allocate between programs as demand for the individual programs changes. Innovation Fund Tax Credits have been mostly accounted for as the limit of eligible funds has been reached and there is more demand for Angel Investor Tax Credits. These allocations must be determined on or before June 30 of each year. The bill keeps the overall cap on these types of credits at $10 million. The division is effective upon enactment.
Division X – Parity for telehealth mental health services – This will require an insurer to reimburse providers at the same rate for telehealth mental health services as they would for in-person services.
Division XI – High Quality Jobs and Renewable Chemical Production Tax Credits
The bill makes the following changes to the total amount of tax credits that IEDA has the authority to award to companies under the HQJ program and the Renewable Chemical Production Tax Credit program:
- The bill reduces the total amount of tax credits that IEDA has available to allocate to various incentive programs by $35 million.
- Beginning with FY22, IEDA will have $70 million available to allocate to its business incentive programs. The current annual cap for tax credits that can be awarded by IEDA is $105 million.
- The bill also reduces the maximum amount of Renewable Chemical Production Tax Credits that can be issued in any year from $10 million to $5 million. The latest report by IEDA indicated the program issued just over $1.25 million in credits to two companies in FY20. The total issued over the last three years is just under $2.8 million.
Division XII – High Quality Jobs – Eligibility Requirements – This would allow IEDA to account for reductions in operations due to COVID-19 when reviewing a company’s eligibility for awards under the HQJ program. Currently, a reduction in operations is presumed when there is a reduction any time in the previous 12 months, and would make the company ineligible for assistance from the program.
Division XIII – Manufacturing 4.0
This establishes a “Manufacturing 4.0 Technology Investment Program” (M4.0TI). Manufacturing 4.0 is the process of updating existing manufacturing processes to include specialized hardware, software or other equipment that will improve the manufacturer’s productivity, efficiency and competitiveness.
The bill establishes a Manufacturing 4.0 Technology Investment Fund to assist in financing qualified investments. The fund is meant to operate as a revolving loan fund, using funds appropriated by the Legislature or other funds available to IEDA that can be lawfully used for that purpose. There is no appropriation to the fund in this bill. The bill also authorizes IEDA to transfer money from this fund to any other funds under its control, except for funds that have been appropriated to the M4.0TI fund by the Legislature.
The bill lays out the process and requirements for a company to apply for assistance from the fund. Applications will be reviewed by IEDA, which may engage an outside technical review panel to assist in the process. The application must be assessed by the Center for Industrial Research and Service at Iowa State University to ensure that the proposed investment is consistent with M4.0TI project guidelines.
Division XIV – Energy Infrastructure Revolving Loan Program – This division of the bill winds down the existing Alternative Energy Revolving Loan Program (AERLP) and transitions those funds to a new Energy Infrastructure Revolving Loan Program. The current AERLP provides zero-interest loans to develop alternate energy production and small hydroelectric energy facilities. The new Energy Infrastructure Revolving Loan Program would not be focused solely on developing alternative energy production.
It would help with energy infrastructure, including:
- Electric and gas generation transmission, storage or distribution infrastructure
- Electric grid modernization
- Energy-sector workforce development
- Emergency preparedness for rural and underserved areas
- Expansion of biomass, biogas and renewable natural gas
- Innovative technologies
- Development of infrastructure for alternative fuel vehicles
Division XV – Workforce Housing Tax Incentives – This bill provides a $5 million increase for the Workforce Housing Tax Incentive Program. This would raise the total program to $30 million annually. The $5 million increase is set aside for the “small cities” portion of the program. This will even out the money available for projects in the “small cities” program with those in Iowa’s largest 11 counties. The bill also provides $15 million to address the backlog for tax credits in the large cities portion of the program over two years.
Division XVI – Redevelopment tax credits – brownfields and grayfields – This division would extend the brownfields and grayfields Redevelopment Tax Credit Program by 10 years to 2031. The bill also increases the total tax credits available through the program by $5 million to $15 million per year.
Division XVII – Downtown Loan Guarantee Program
This creates a Downtown Loan Guarantee Program to be administered by IEDA in partnership with IFA. The program is designed to encourage downtown businesses and banks to reinvest and reopen following the pandemic. IEDA and IFA will partner with Iowa financial institutions to secure funding for eligible projects.
For a loan to be guaranteed, projects must meet all these criteria:
- The loan finances an eligible Community Catalyst Building Remediation Grant Project or Main Street Iowa Challenge Grant within a designated district
- A rehabilitation component and may include acquisition or refinance
- At least 25% of project costs are for construction or renovation
- Include an eligible housing component
- Have a federally insured financial lending institution issued the loan
- The loan does not reimburse the borrower for working capital or operations
- Meet certain Main Street Iowa design reviews
For a loan of $500,000 or less, the guarantee will not exceed 50% of the loan. On a loan greater than $500,000, IEDA may provide a maximum loan guarantee of up to $250,000. IEDA may also deny a loan guarantee for unreasonable bank loan fees or interest. The lender will pay an annual loan guarantee fee as set by rule. The loan is not transferrable if the loan or the project is sold or transferred. The loan must not be insured or guaranteed by another local, state or federal guarantee program. In the event of default, the loan guarantee proportionally pays the guarantee percentage of the loss to the lender.
Moneys for the program may consist of any funds appropriated by the Legislature for this purpose and any other funds available to IEDA. There is no appropriation in this bill. IEDA will receive annual loan guarantee fees from the lenders in this program.
Division XVII – Disaster Recovery Housing Assistance – This establishes a Disaster Recovery Homeowner Assistance Program and Fund under IFA to provide forgivable loans and grants to eligible homeowners and renters of disaster-affected homes. In addition, the bill creates an Eviction Prevention Program, with funding coming from the new Disaster Recovery Housing Assistance Fund.
Disaster Recovery Housing Assistance
The bill allows unobligated and unencumbered moneys in certain IFA revolving loans funds to be transferred into the new Disaster Recovery Homeowner Assistance Fund. IFA revolving loan funds include the Senior Living Revolving Loan Program Fund, Home and Community-Based Services Revolving Loan Program Fund, Transitional Housing Revolving Loan Program Fund, and the Community Housing and Services for Persons with Disabilities Revolving Loan Program Fund.
In addition, the bill permits IFA to transfer any unobligated and unencumbered moneys from any IFA fund (notwithstanding any other law to the contrary) for deposit in the new Disaster Recovery Homeowner Assistance Fund with the prior written consent and approval of the Governor. The bill also allows the executive director of IFA to transfer any unobligated and unencumbered money from any fund under IEDA to the Disaster Homeowner Assistance Fund with the written approval of the director and the Governor. Any transfer must be reported to the Legislative Fiscal Committee of the Legislative Council on a monthly basis.
IFA will not use more than 5% of the moneys in the fund at the beginning of a fiscal year for administrative costs.
A “disaster-affected home” refers to a primary residence that is destroyed or damaged in a natural disaster, on or after the effective date (immediately), that is located in a county under a Governor’s proclamation that authorizes Disaster Recovery Homeowner Assistance. It also refers to a primary residence that is destroyed or damaged in a natural disaster (Governor-declared disaster emergency proclamation that authorizes Disaster Recovery Housing Assistance or Presidential-declared disaster in which Iowans are eligible for federal individual assistance) on or after March 12, 2019, but before the effective date of this act.
IFA will provide the funds to local program administrators to award the forgivable loans. IFA may enter into an agreement with one or more local program administrators to administer the program and money in the fund. “Local program administrator” means:
- Ames, Cedar Falls, Cedar Rapids, Council Bluffs, Davenport, Des Moines, Dubuque, Iowa City, Waterloo and West Moines. These cities are entitlement cities under the Community Development Block Grant from federal Housing and Urban Development.
- A Council of Governments whose territory includes at least one county that is subject of a Governor’s disaster emergency proclamation that authorizes Disaster Recovery Housing Assistance or the Eviction Prevention Program.
- A Community Action Agency whose territory includes at least one county that is subject of a Governor’s disaster emergency proclamation that authorizes Disaster Recovery Housing Assistance or the Eviction Prevention Program.
For a homeowner to be eligible for a forgivable loan or grant:
- The loan may be used for repair or rehabilitation, or the down payment on the purchase of replacement housing (and cost of repairs to replacement housing to render it decent, safe and sanitary).
- The maximum forgivable loan award will be determined by IFA by rule.
- The replacement housing cannot be located in a 100-year floodplain.
- The forgivable loan will have a five-year term and will be interest free.
The bill also includes requirements for a renter to be eligible for a forgivable loan or grant under the Eviction Prevention Program.
Eviction Prevention Program
- IFA will establish and administer an Eviction Prevention Program that awards grants to eligible renters and to eviction-prevention partners. Grants may be awarded following a Governor’s disaster emergency proclamation that authorizes the program.
- “Eligible renter” is one whose income meets program qualifications (adopted by rule), who is at risk of eviction and who resides in a county subject of a Governor’s disaster emergency proclamation that authorizes the program.
- “Eviction prevention partner” is a qualified local organization or a government entity as determined by IFA rule.
- Grants will be used for short-term financial rent assistance to keep eligible renters in their current residences. Grants to an eviction prevention partner will be used for short-term financial rent assistance or services provided to eligible renters. IFA will establish by rule the maximum forgivable loan and grant amounts awarded.
This division is effective upon enactment. There is no appropriation in the bill. Administrative costs for the program will be paid for by the annual 5% administrative allowance cap in the bill.
Division XIX – Bonus Depreciation – This will allow Iowa taxpayers to use the federal accelerated depreciation for equipment purchases, which allows a business to expense up to 50% of the cost in the first year instead of depreciating over time. Iowa currently is not conforming with this federal tax provision and requires taxpayers to use a separate depreciation schedule for their federal and state tax returns.
Division XX – Beginning Farmer Tax Credit
This expands the Beginning Farmer Tax Credit, effective January 1, 2022, by:
- Updating definitions; removing a requirement for a non-building land lease to receive the tax credit.
- Increasing from 10 to 15 years the amount of time a landowner/taxpayer can participate.
- Allowing landowner/taxpayer to enter into agreements with multiple beginning farmers during any tax year.
- Increasing tax credit cap to $50,000 per agreement.
- Changing the period of participation to allow involvement from tax year 2019 and continuing for 15 years.
Division XXI – Mental Health Funding/Property Taxes
MHDS Levy. The bill eliminates the Mental Health and Disability Services (MHDS) property tax levy over a two-year period, with all county levies reduced to no more than $21.14 per capita for FY22 and reduced to $0 beginning in FY23. State funds will be distributed quarterly to the Mental Health Regions starting July 1, 2021.
Per Capita State Appropriations. The bill provides these per-capita General Fund appropriations:
- $15.86 for FY22
- $38 for FY23
- $40 for FY24
- $42 for FY25
- Beginning in FY26 and beyond, the previous year’s appropriation is multiplied by a growth factor indexed to sales tax growth for the preceding fiscal year, not to exceed 1.5%.
State funding is to be deposited into a MHDS Regional Service Fund under the Department of Human Services (DHS). To receive funds, regions must enter into “performance-based” contracts with the state.
Fund Balances. The bill amends provisions related to county fund balances by requiring them to be pooled by the region. Regional fund balances are limited to 40% of the proposed gross expenditures for the fiscal year beginning in FY22. In FY23, fund balances are limited to 20%, and in FY24 and beyond, fund balances are limited to 5%.
Beginning in FY22, state per-capita appropriations to a MHDS region are reduced if the MHDS region has a fund balance in excess of the fund balance cap specified above. The reduction doesn’t begin until the second half of the year, once fund balances are certified on December 1. The MHDS regions also must pay back any funds received in the first two quarters of the fiscal year if fund balances exceeded the cap. Any funds paid back or withheld are appropriated to the MHDS Incentive Fund.
Region Incentive Fund. The bill creates a MHDS Incentive Fund within the MHDS Regional Service Fund to provide additional funding to the MHDS regions. If the combination of taxes levied, reserve funds used and per-capita state funds distributed still leaves the region short of its budget, and it has spent reserve funds to required levels, the region can apply to DHS for additional funds.
The bill establishes the criteria for DHS to distribute funding. It also makes a General Fund appropriation of $10 million to the MHDS Incentive Fund for FY22 and $5.2 million for FY23. Beginning in FY26, any funds in the MHDS Incentive Fund will be multiplied by the sales tax growth rate for the preceding fiscal year, minus 1.5%.
Division XXII – Elimination of Commercial and Industrial Property Tax replacement payments
The bill eliminates the commercial and industrial property tax replacement payments (the backfill) to most local governments over a six- to eight-year period as the state increases its share of funding for the MHDS system.
School districts will stop receiving backfill payments in one step, which is replaced and accounted for by increasing total state aid to schools. Schools currently get $60 million ($59.7 million exactly) from the backfill.
- $41.8 million of this is General Fund money
- $18 million is specific levy funds that WON’T be replaced by increasing the foundation level (see below/Div. III)
- Management Levy
- Amana Library
- Voted PPEL
- Regular PPEL
- Debt Service
The backfill was created as part of the bipartisan compromise to reduce property taxes on businesses. The backfill was designed to provide funding to local governments to replace the lost revenue from the 10% rollback on business property taxes. Without the backfill, local governments would likely have had to increase property taxes on residential and agricultural property, which would have resulted in a tax shift from businesses onto homeowners and farmers.
The backfill provides more than $152 million to local governments to protect taxpayers and provide critical services. Eliminating the backfill will put more of the burden for funding local services on property taxes.
Division XXIII – Increases the school aid foundation level from 87.5% to 88.4%
Schools would get an additional $65.4 million in state aid. This increase is an effort to offset the loss of backfill payments for the uniform levy and additional levy (the school aid formula levy parts or the school levy).
This increase in school foundation aid doesn’t help the other portions of the school levies (above). Many school districts are levying at their maximum rate now, so the loss of backfill payments will mean less funding. Where that isn’t the case, the loss of the backfill payments will likely cause property taxes to increase.
Division XXIV – Eliminates the Public Educational and Recreational Levy (PERL)
This is a voter-approved levy with a rate of $0.135/$1,000 of taxable valuation. These funds can be used for community tennis courts, swimming pools, other community recreational items and community education purposes. The bill allows existing PERL levies to continue for three years, but reduces those levies by half.
- 27 school districts have this levy, and it has grown over the past few years.
- The bill would allow these school districts to use SAVE funds to maintain the facilities/programs that had been provided by PERL property tax revenues.
Division XXV – Elderly Property tax credit
This division creates an additional property tax credit for those age 70 and above who have incomes below 250% of the federal poverty level. Under this “new program,” individuals will qualify for an expanded tax credit in which they receive the greater of:
- The amount of the existing elderly tax credit (IA Code 425.17) the claimant would qualify for, up to a maximum of $1,000.
- The difference between the taxes due for the assessment year after the qualified claimant turns 70 compared to the taxes due for future assessment years. The taxpayer must apply annually.
This proposal could potentially freeze property taxes for qualified individuals 70 and above. This new provision is not reimbursed by the state, so the cost of the credit is borne by local governments through revenue reductions or shifting costs to other taxpayers in the jurisdiction.
Division XXVI – Transit district hotel/motel tax: – This is a new hotel/motel tax that regional transit districts or non-participating cities could levy to reduce or possibly replace the transit district levy that is currently used to pay for public transit in the jurisdiction. Non-participating cities (not currently a member of a transit district) would need voter approval to institute a transit hotel/motel tax. Moneys raised by the transit hotel/motel tax must be used exclusively for operating the transit district. However, the bill allows revenue from the hotel/motel tax in the first year and revenue in the second year of the tax that exceeds the first year of the tax to be used be used exclusively to lower the transit levy rate for the jurisdiction.
[5/11: 12-6 (Excused: Koelker, J. Smith, T. Taylor)]