HF 2317 – Republican tax plan
Individual income tax rates
Corporate income taxes/business tax credits
Income tax rate reduction – The plan would phase in a flat income tax rate structure beginning in 2023. Eventually, there will be a single income tax rate of 3.9% for all taxpayers. There are no changes to existing deductions and credits, as there would be under a true “flat-tax.”
|Brackets||Current law (TY23)||TY23||TY24||TY25||TY26 and After|
|6,000 – $30,000||4.82%||4.82%||4.82%||4.82%||3.9%|
Retirement and Pension income exclusion – The bill would exempt all retirement income from pensions and individual retirement plans from the state income tax beginning in 2023. Currently, the state exempts the first $6,000/$12,000 of pension and retirement plan income from state taxation.
Farmer Retirement income exclusion – The bill provides an income exclusion for specific income for retired farmers who had been actively engaged in the farming operation, including specified capital gains from the sale of farmland and livestock OR cash rent payment income, but not both.
Expansion of existing employee stock capital gains exemption – The bill expands the existing Employee Stock Ownership Program (ESOP) income exemption by increasing the existing exemption from 50% of the ESOP net capital gain to 100%. A part of the proposal also includes an exemption for the net capital gain on single-corporation stock when the individual worked for that corporation, subject to other qualifications.
Corporate income taxes
Corporate income tax rate reduction – The bill will lower corporate income tax rates from 9.8% to a top rate of 8.8%.
|Brackets||Current Law (TY 24)||TY 23||TY 24-TY 26||TY 27 and Later|
|$25,001 – $100,000||5.5%||5.5%||5.5%||5.5%|
|100,001 – $250,000||9.0%||9.0%||8.9%||8.8%|
Changes to tax credits
Research Activities Credit (RAC) – The bill makes a number of changes to the calculation, use and claiming of this credit. The Research Activities Credit Is available for qualified research activities done in Iowa by companies doing business in certain industries, including manufacturing, life sciences, software engineering, aviation/aerospace and agri-sciences. These are very lucrative credits that result in large refunds being issued to a number of major companies.
The bill makes a number of adjustments to the RAC, including:
- Beginning in 2023, the maximum refundable tax credit that can be claimed will be reduced by 10% each year for five years until it reaches 50% of the amount of available credit in excess of the company’s tax liability.
- The bill also phases out the use of supplies as an eligible expense under the RAC. The percentage of supplies eligible to be claimed will be reduced by 20% each year until it is eliminated entirely.
- Qualifications are also placed on wages that can be claimed as an eligible expense. Wages can only be included if the person spent the majority of their time directly on research. Also, the bill will decouple from a federal rule that allows a person’s annual qualifying wages to be rounded up to 100% if at least 80% of the person’s annual time was spent on research.
- Entities that apply for the state RAC must compute their credit claim using the same method that they use on their federal tax returns (regular or simplified calculation of expenses).
- The bill provides that the RAC must be given priority under the existing High-Quality Jobs (HQJ) program when the Economic Development Authority is awarding those credits.
Additional development tax credits – The bill phases in reductions in refundability for a number of other tax credits used by developers to improve and redevelop properties. The refundability for these credits will be reduced by 5% per year for five years until the maximum refundable amount is 75% of the available credit in excess of the company’s tax liability.
Endow Iowa tax credit – This will lower the maximum tax credit an individual can claim under the program. Currently, an individual would be eligible to claim a credit up to $300,000. This reduces the maximum credit to $100,000, which will allow more individuals to claim the tax credit and should help produce more contributions to community endowment programs across the state.
Sunset of the geothermal tax credit – The bill sets a hard expiration date to the geothermal heat pump tax credit. The credit will not be available for installations after December 31, 2023.
General fund “safety net”
This proposal would provide a way to generate at least 3.5% annual General Fund budget growth in the future as the tax cuts go into effect. The proposal states that if the Revenue Estimating Conference does not project a 3.5% increase in the General Fund, and surplus revenues that carryforward are not sufficient to provide that rate of growth, money will be transferred from the Taxpayer Relief Fund into the General Fund to reach that rate of growth. This will also serve as a backstop if revenues fail to meet REC estimates, at least to the 3.5% rate of growth when establishing the 99% expenditure limitation amount.
This proposal is similar to what House Republicans had included in their tax plan, in which they appropriated money out of the Taxpayer Relief Fund into the General Fund as tax cuts were implemented. Senate Republicans also planned a similar transfer of money into the General Fund, but those changes were going to be done as part of the appropriations process. The Governor’s plan was silent on the use of the Taxpayer Relief Fund.
This compromise does not include a portion of the Senate Republican plan that would have turned the Taxpayer Relief Fund into the “Income tax elimination fund” and would have used excess funds as a way to automatically cut taxes in the future.
Republicans say that this “safety net” helps ensure that they can fund priorities while also cutting taxes. This source of funding will likely only decrease in the future, because excess revenues will no longer automatically accumulate in the fund the way they have in the past. Additionally, the calculation of the 99% expenditure limitation is only relevant if the budget proposes to spend up to that amount. While the budget might allow a higher level of spending, Republicans have consistently chosen to spend at lower levels than the 99% limitation.
[2/24: 32-16 (Yes: Republicans, Bisignano, Kinney; Absent: Zaun, Zumbach)]
HF 728 – Septic tanks – prohibit penalties for certain local ordinances
HF 728 would prohibit a local government from requiring a resident to pay a penalty, fine or fee for noncompliance with local rules regarding pumping as part of routine maintenance.
This legislation is in response to an ordinance adopted in Story County that requires routine maintenance to take place on septic tanks—which can include pumping the tank—every five years. Iowa Department of Natural Resources and EPA guidelines recommend servicing septic systems every three to five years, but those are not regulatory requirements.
[2/28: 28-17, Party-line (Except Yes: Dotzler; No: Williams; Absent: Carlin, Hogg, J. Taylor, Zaun, Zumbach)]
SSB 3147 – Department of Revenue Omnibus
SSB 3147 makes a number of largely technical changes to the administration of taxes by the Department of Revenue (IDR).
- Records Retention – The bill requires the destruction of “useless” records by the department, instead of allowing the destruction of such records following a review process. “Useless” records are those that are past the time of review for the record or examination of a filing is completed. The bill would allow retention of such records at the request of a taxpayer or the department. Additionally, the department can retain records after personally identifiable information has been removed from the record.
- Mandatory electronic filing of business entity returns – The bill requires corporations, partnerships, composite filers, fiduciaries and franchise taxpayers to file their returns with the department electronically. This requirement applies to all business filers with more than $250,000 in gross receipts, as well as composite filers with 10 or more K-1 returns, or an entity that claims more than $25,000 in credits per year.
- Mandatory electronic filing for credit union returns – Credit unions must file their returns for monies and credits electronically beginning in 2024. This aligns with the planned modernization rollout that will impact those taxes.
- Authority to charge fees – IDR will adopt rules for charging fees for copies of a tax return.
- Third-party access/power of attorney – This clarifies existing third-party access laws by adding a trustee to the list of people who may act on behalf of a taxpayer, as well as allowing employees authorized to act on behalf of a corporation or association.
- Electronic communication with the department – This clarifies existing language when a taxpayer chooses to communicate with the department by electronic messages instead of paper. This will make the option for electronic communication an opt-in process, at the preference of the taxpayer. Also, if a notice is posted or sent to a taxpayer by electronic communication as well as paper, the date of the notice is the earlier of the electronic posting or mailing.
- Income statements provided to the department – This clarifies when income statements (W-2s, 1099s) must be filed with the department and provided to the taxpayer by a business. The bill also allows the director to allow an extension on the filing of income statements in the case of illness, disability or absence, or when good cause is shown for the delay in filing.
- Real estate transfer tax remittances – The bill changes Code language to match the current practice of how real estate transfer taxes are remitted to IDR. Code currently says that the recorder remits the taxes to the county treasurer, but in practice the taxes are remitted to IDR by the recorder.
- Local board of review eligibility – This will prohibit an individual from being reappointed to the local board of review for six years following their removal by the director of the department. The local board of review handles protests of property tax valuations by the local assessor.
- Appeals of equalization adjustment – The bill updates the process for providing notice of intent to appeal equalization adjustments to match current practice. Following a notice to appeal, the department will schedule a hearing with the county auditor or assessor, not the board of supervisors or city council.
- Business property tax credits – This portion of the bill would change the existing business property tax credit (BPTC) application and administration process by replacing the credit with an assessment adjustment on eligible properties. Under the new process, eligible properties would receive a “rollback” equal to the rollback on residential property valuations for the first $150,000 of their property values. This process mirrors the practical effect of the BPTC for business owners now. The property owners should not see any change in the impact to their property taxes from this change in process. Local governments would still receive their share of the reimbursement for the credit, but it would be a “backfill” appropriation from the state instead of an appropriation to pay for the BPTC.
Currently, an eligible property files for a business property tax credit with their local county. Every county treasure must annually submit a list of properties that are applying for the credit to the state for the purposes of determining the amount of the credit that each property will be eligible to receive. The funding for the credit comes from a standing $125 million appropriation that is deposited into the BPTC fund, which then reimburses counties for the amount of credits that are issued to businesses in that county. This system was created as part of SF 295 in 2013, which was designed to lower property taxes on businesses.
The credit was proposed by Senate Democrats, with the goal that local governments and other property taxpayers would not be impacted if the state didn’t fulfill its commitment to funding the BPTC. This is process helped guarantee the state met its commitment because a failure to fund the BPTC would result in a tax increase on property owners instead of a loss of revenue to local governments. The new method of administering the BPTC will open the door to the state once again failing to keep its commitments to local governments and property taxpayers.
- Wage assignment notices – This section aligns the notice requirements for wage assignments for overdue collections. The notice period requires 20 days’ notice, but Code then requires collections to begin within 14 days. The bill aligns the collections timeline with the notice timeline.
- Reciprocal tax collections with other states – This would allow IDR to enter into agreements with other states to help collect Iowa taxes owed by individuals who live in the other state, and vice versa. Currently, the state does not have an administrative method available to compel the payment of taxes from someone who does not reside in the state.
- Pass-through entities – This part of the bill makes a number of changes to references to “partnerships” and replaces them with “pass-through” to update the terminology.
- Inheritance Tax – Unknown heirs – This section applies the five-year phase-out of the inheritance tax passed last session to the tax rate on unknown heirs.
- Publication of Interest Rates – This removes a requirement that IDR must publish interest rates in the newspaper and instead allows the rates to be published on the department’s internet site.
- Property Assessment Appeals Board – Salaries – This would change the salary classification level that governs members of the Property Assessment Appeals Board. Currently, the members are in salary range 5, which includes the state public defender, labor commissioner, and others. The bill would place them in salary range 6, which would align them with the range for another group of state administrators, including the superintendent of banking and the Alcoholic Beverages Division administrator.
The committee adopted an amendment to fix a number of errors to the bill that were not addressed and provisions that were inadvertently omitted during the bill drafting process. These include:
- Amending the date when IDR is required to draft legislation to clean-up cross references in Code following the repeal of the inheritance tax from 2022 to 2024.
- Clarifying when filings are due when the due date falls on a holiday (the following business day).
- Making technical change to aviation and marine fuel tax refund administration.
- Fixing the section on third-party access/power of attorney – This fixes part of the language regarding a trustee, as well as providing access for someone designated as a general or durable power of attorney and a successor to a very small estate (less than $50,000).
- Filing penalties for pass-through entities.
- Clearly placing the salary for PAAB members in the pay range for senior administrative law judges, which was the original intent of the department’s proposal.
[2/28: 11-6, Party-line]
SSB 3152 – Aircraft special certificates, sales and use tax exemptions
SSB 3152 makes a number of changes to special certificates for aircraft. These certificates can be used by an aircraft manufacturer or dealer instead of registering the aircraft, as long as the aircraft is only being used for transport, testing, demonstration or sale. The bill limits the time a certificate can be held to not more than three years, as well as increasing the annual fee from $100 to $400. Additionally, the bill would allow the Department of Transportation (DOT) to deny, suspend or revoke the special permit or application for a special permit of a person in violation of the terms of its use. Fees collected from issuing special certificates will also be deposited into the state aviation fund, which currently receives fees from aircraft registration.
The bill also makes changes to the existing sales and use tax exemptions on aircraft repair. Currently, there is a sales/use tax exemption for component parts, and repair and replacement materials for planes used in non-scheduled FAA certified operation. The bill expands the sales/use tax exemption so that it applies to sales and repair of all registered aircraft.
[2/28: 16-1 (No: Quirmbach)]