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SSB 3074 – Senate Republican tax proposal
SSB 3074 makes many changes to taxes and tax policy, including individual income tax, sales tax, corporate income tax and business tax credits.
Income Taxes
Income tax rate reduction – The bill would phase in a flat income tax rate structure beginning in 2023. Eventually, there will be a single income tax rate of 3.6% for all taxpayers. There are no changes to existing deductions and credits, as there would be under a true “flat-tax.”
| Brackets | Current law (TY 23) | TY 23 New | TY 24 | TY 25 | TY 26 | TY 27 |
| $0-$6,000 | 4.4% | 4.4% | 4.4% | 4.4% | 3.85% | 3.6% |
| 6,000 – $30,000 | 4.82% | 4.82% | 4.82% | 4.82% | 3.85% | 3.6% |
| $30,000-$75,000 | 5.70% | 5.7% | 5.7% | 4.82% | 3.85% | 3.6% |
| $75,000+ | 6.50% | 6.0% | 5.7% | 4.82% | 3.85% | 3.6% |
Future income tax rate reductions – Following this phase-down of tax rates, the plan would use the Taxpayer Trust Fund (which Senate Republicans are proposing to rename the “Income Tax Elimination Fund”) to “buy down” income tax rates, with the goal of eliminating the income tax completely. Currently, excess state revenues are deposited into the Taxpayer Relief Fund. Under this plan, the Department of Revenue would adjust the income tax rate based on the amount of money that has accumulated in the fund. After adjusting the income tax rate, the money in the fund will be transferred into the General Fund to cover the fiscal impact of the rate reduction.
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 taxes.
National Guard pay income tax exemption – The bill exempts additional National Guard pay from the state income tax. This new exemption would apply to full-time and annual training duty (Title 32). Current National Guard pay exempt from taxes is active duty deployment pay (Title 10).
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 7.8%.
| Brackets | Current Law (TY 24) | TY 24 New | TY 25 | TY 26 | TY 27 | TY 28 |
| $0-100,000 | 5.5% | 5.5% | 5.5% | 5.4% | 5.4% | 5.3% |
| 100,001 – $250,000 | 9.0% | 9.0% | 9.0% | 8.6% | 8.2% | 7.8% |
| $250,001 + | 9.8% | 9.4% | 9.0% | 8.6% | 8.2% | 7.8% |
Franchise tax rate reduction – The bill provides a rate reduction on the franchise tax paid by banks. The bill phases in a tax cut, going from the current 5% down to 4% in 2027.
Insurance premium tax rate reduction – The bill also reduces the tax rate for insurance companies by lowering the tax rate on insurance premiums from 1% to .9% over a two-year period.
Sales and Use Taxes
Changing the existing Local Option Sales Tax (LOST) to a statewide sales tax – The bill increases the statewide sales tax rate from 6% to 7%. In doing this, the state will eliminate the current LOST. The state will continue to distribute the current LOST portion to the local jurisdiction where the sales tax was incurred.
The proceeds from the sales tax would continue to be used as designated by the revenue purpose statement adopted by the local government. In jurisdictions without a valid revenue purpose statement, the funds will be used to reduce the county basic levy or city general levy, debt service levy, and then other levies assessed by the county or city.
I-WILL/Natural Resources and Outdoor Recreation Trust Fund – By increasing the state sales tax from 6% to 7%, the bill would enact the constitutionally protected funding source for the Natural Resources and Outdoor Recreation trust fund that was approved by voters in 2010. However, the bill also makes many changes to the trust fund formula, which was adopted prior to approval by voters. Additionally, there is no guarantee that the funds will be in addition to current funding for conservation and recreation purposes, as was the intent of the original proposal.
Other sales tax increases/changes – The bill contains several other changes to sales taxes. It:
Sales Tax administration changes – The bill modernizes Department of Revenue processes for collecting sales tax, as requested by DOR.
Changes to tax credits
Research Activities Credit (RAC) – The bill makes changes to the calculation, use and claiming of this credit. The Research Activities Credit is available for qualified research 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 in the state.
The bill makes a number of adjustments to the RAC, including:
Renewable Chemical and Redevelopment tax credits – The bill reduces the refundable amount of these tax credits from the current 100% to 75% in 2023 and 50% beginning in 2024.
S-Corporation Apportionment tax credit – The bill removes the S-Corporation apportionment tax credit. Currently, the taxpayer can choose between this credit and the out-of-state tax credit for apportioning their income. This credit is meant to treat S-Corporation shareholders the same as C-Corporations so they only pay taxes on the S-Corporation’s Iowa-based sales. Under the bill, S-Corporation taxpayers will use the out-of-state tax credit.
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.
Repeal of the charitable conservation contribution tax credit – The bill would eliminate the charitable conservation contribution tax credit beginning in 2023. This tax credit is equal to 50% of the fair market value of qualifying contributed property. Charitable conservation contributions are voluntary restrictions on the use of land negotiated by a landowner and a private charitable conservation organization or government agency chosen by the landowner to hold the contribution. The tax credit assists landowner and organization efforts to establish the land use agreement and ensure the land meets the conservation standards outlined in the agreement.
[2/3: 11-6, Party line]