Fiscal Note
Fiscal Services Division
SF 587 – Tax Omnibus (LSB2179SV)
Staff Contacts: Jess Benson (515.281.4611) jess.benson@legis.iowa.gov
Jeff Robinson (515.281.4614) jeff.robinson@legis.iowa.gov
Michael Guanci (515.725.1286) michael.guanci@legis.iowa.gov
Fiscal Note Version – As amended and passed by the Senate
Senate File 587 contains eight divisions and makes various changes to county property taxes,
State income taxes, and tax credits, and makes appropriations. Some explanation of the fiscal
impact may be contained in the “assumptions” sections for the Bill divisions, but Figures 4, 5, 6,
and 7 summarize the fiscal impact of the Bill.
Division I — Mental Health and Disability Services (MHDS) Funding
Description
Division I changes the way mental health and disability services are funded, from a system
based on county property taxes to a 100.0% State funded system. The Division is effective
upon enactment.
MHDS Levy. The Division eliminates the MHDS property tax levy over a two-year period, with
all county levies reduced to no more than $21.14 per capita for FY 2022 and reduced to $0
beginning in FY 2023.
Per Capita State Appropriations. The Bill creates a new Mental Health and Disability
Services Regional Supplemental Fund and establishes a General Fund standing appropriation
to the Department of Human Services for distribution to the MHDS Regions based on the
following per capita amounts:
• $15.86 for FY 2022.
• $38.00 for FY 2023.
• $40.00 for FY 2024.
• $42.00 for FY 2025.
• Beginning in FY 2026 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%.
Fund Balances. The Bill amends provisions related to county fund balances by requiring all
county fund balances to be pooled by the MHDS Region. Regional fund balances are limited to
40.0% of the preceding fiscal year’s actual expenditures beginning in FY 2022. In FY 2023,
fund balances are limited to 20.0%, and in FY 2024 and beyond, fund balances are limited to
5.0%.
Beginning in FY 2022, State per capita appropriations to an MHDS Region are reduced if the
MHDS Region has a fund balance in excess of the fund balance cap specified above. The
reduction does not begin until the second half of the year once fund balances are certified on
December 1. The MHDS Regions are also required to pay back any funds received in the first
two quarters of the fiscal year if fund balances exceeded the cap. Any funds that are paid back
or withheld are distributed to the MHDS Risk Pool.
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Polk County. The Bill allows for the transfer of both funds and in-kind services from
Broadlawns Hospital to Polk County MHDS for fiscal years 2021 through 2024.
In-Risk Pool. The Bill creates an MHDS Risk Pool in the Property Tax Relief Fund to provide
additional funding to the MHDS Regions. The Bill establishes the composition of the Risk Pool
Board and the criteria for the Board to distribute funding.
The Bill makes a General Fund appropriation of $10.0 million to the MHDS Risk Pool for
FY 2022 and $5.2 million for FY 2023. Beginning in FY 2026, any funds in the Risk Pool will be
multiplied by a Risk Pool growth factor, not to exceed 3.5% in a fiscal year, equal to the sales
tax growth rate for the preceding fiscal year, minus 1.5%.
Background
The current MHDS system is a regional system managed by the counties with State oversight.
Counties finance a portion of the system with a county property tax levy that is capped at a per
capita dollar amount for each of the 14 regions, totaling $116.8 million for FY 2021. The State
finances the majority of the services provided through the Medicaid Program. For a complete
funding history of the MHDS system back to 1995, please see the related Issue Review.
Assumptions
• The FY 2022 MHDS levy will be reduced to $66.7 million in FY 2022 and $0 in FY 2023.
• Based on population trends from 2015 through 2019, population increases are estimated to
be 0.3% in 2020 through 2025.
• The MHDS per capita growth rate appropriation is estimated to be 1.5% for FY 2026 through
FY 2028.
• It is not possible to estimate funds available in the MHDS Risk Pool beyond what is
appropriated by the State in FY 2022 and FY 2023 due to the uncertainty of future county
fund balances and amounts counties will be required to send back to the Risk Pool.
Division II — Commercial and Industrial Property Tax Replacement
Description
Beginning in FY 2023, the General Fund standing appropriation for commercial and industrial
property tax replacement payment for cities and counties will be phased out in four or six years,
depending on how the tax base of the city or county grew relative to the rest of the State since
FY 2014. Cities and counties where the tax base grew at a faster rate than the statewide
average from FY 2014 through FY 2021 will have the backfill phased out over a four-year period
from FY 2023 to FY 2026, while those that grew at a rate less than the statewide average will
have the backfill phased out over a six-year period from FY 2023 to FY 2028. School district
backfill payments will be eliminated after FY 2022. Taxing authorities that are not schools,
cities, or counties will have their backfill payment phased out over six years.
After the change, the reimbursement amount received by each taxing authority that is not a
school district will be a percentage of the reimbursement the taxing authority received in
FY 2022, with the percentage decreasing until phased out completely for the taxing authority by
either FY 2026 or FY 2028.
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Background
2013 Iowa Acts, chapter 123 (State and Local Taxation), established a set commercial and
industrial taxable value rollback of 90.0000%, a reduction from the 100.000% rollback usually
experienced by those property classes. The 2013 Act also established a standing appropriation
designed to reimburse local governments for the property tax revenue loss that results from the
taxable value reduction. Iowa Code section 441.21A established the standing appropriation for
the reimbursement to local governments (backfill) and limits the total amount of the annual
appropriation, beginning with FY 2017, to no more than the amount of the appropriation for
FY 2016. Since FY 2017, the annual backfill appropriation has been limited to $152.1 million.
The revenue that local governments receive from the State for the backfill is treated as property
tax for local government finance purposes.
Assumptions
Beginning in FY 2023, State revenue from the commercial and industrial property tax
replacement backfill payments will cease beginning in FY 2023 for the following school district
levies:
• General fund levy
• Instructional support levy
• Management levy
• Amana library levy
• Voted physical plant and equipment levy (PPEL)
• Regular PPEL
• Public Education and Recreation Levy (PERL)
• Debt service levy
The Department of Management (DOM) estimated the impact of the changes to the commercial
and industrial property tax replacement backfill using actual taxable amounts by taxing authority
for FY 2014 and FY 2021, along with actual backfill amounts received for FY 2021. Figure 1
provides the estimated backfill amounts by local government type under current law and under
the proposed change as estimated by the DOM. The final line in the table represents both the
reduction in local government revenue and the reduction in the State General Fund
appropriation for commercial and industrial property tax reimbursement backfill.
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 Figure 1
Estimated Change to the General Fund Appropriation for
Commercial and Industrial Property Tax Replacement
In Millions
FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028
Schools
Current Law $ 59.6 $ 59.6 $ 59.6 $ 59.6 $ 59.6 $ 59.6
Proposal 0.0 0.0 0.0 0.0 0.0 0.0
Change $ -59.6 $ -59.6 $ -59.6 $ -59.6 $ -59.6 $ -59.6
Cities
Current Law $ 52.5 $ 52.5 $ 52.5 $ 52.5 $ 52.5 $ 52.5
Proposal 41.2 30.5 20.1 9.4 4.5 0.0
Change $ -11.3 $ -22.0 $ -32.4 $ -43.1 $ -48.0 $ -52.5
Counties
Current Law $ 29.6 $ 29.6 $ 29.6 $ 29.6 $ 29.6 $ 29.6
Proposal 23.4 17.2 11.1 4.9 2.4 0.0
Change $ -6.2 $ -12.4 $ -18.5 $ -24.7 $ -27.2 $ -29.6
Other Local Governments
Current Law $ 10.4 $ 10.4 $ 10.4 $ 10.4 $ 10.4 $ 10.4
Proposal 8.6 6.8 5.1 3.4 1.7 0.0
Change $ -1.8 $ -3.6 $ -5.3 $ -7.0 $ -8.7 $ -10.4
Total
Current Law $ 152.1 $ 152.1 $ 152.1 $ 152.1 $ 152.1 $ 152.1
Proposal 73.2 54.5 36.3 17.7 8.6 0.0
Change $ -78.9 $ -97.6 $ -115.8 $ -134.4 $ -143.5 $ -152.1
Division III — School Foundation Aid
Description
Beginning in FY 2023, the school foundation aid level increases from 87.5% to 88.4% to offset
the revenue from the elimination of the commercial and industrial property tax replacement.
Background
Since FY 1997, the regular program foundation level has been set at 87.5% of the State cost
per pupil and is comprised of a uniform levy of $5.40 per $1,000 of taxable valuation statewide
and State aid from the General Fund.
Assumptions
• Beginning in FY 2023, the regular program foundation level used for calculating State aid for
school districts will increase from 87.5% to 88.4%. This will increase the amount of State
aid going to the foundation level and decrease the additional General Fund levy.
• Under current law, the State cost per pupil for FY 2023 and future fiscal years will remain at
$7,227.
• The foundation level will increase from $6,324 per pupil in FY 2022 to $6,389 per pupil in
FY 2023.
• The property tax replacement payment will remain at $153.
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Division IV — Public Education and Recreation Tax Levy
Description
The Division discontinues authorization to levy for the Public Education and Recreation Levy
(PERL) Fund, repeals the associated levy, and makes conforming changes. The Division also
specifies that the moneys available in the PERL Fund at the end of FY 2024 are to be spent by
schools for purposes previously authorized under law.
Background
The PERL is a voter-approved levy of up to $0.135 per $1,000 of taxable valuation used to
establish and maintain public recreation places and playgrounds in the public school buildings
and grounds of a school district. The PERL revenues are also used to provide public
educational and recreational activities within a district’s boundaries and for community
education under Iowa Code chapters 276 and 300.
Assumptions
• Under the provisions of Division II of this Bill, school districts’ State revenue from the
commercial and industrial property tax replacement backfill payments for the PERL will
cease in FY 2023.
• In FY 2024, 27 school districts will levy property taxes for the PERL at half their previous
levy rate; reducing 27 school districts’ PERL levy to $0.0675 per $1,000 of taxable valuation.
• Starting in FY 2025, property tax rates for 27 school districts will be reduced by $0.135 per
$1,000 of taxable valuation.
Division V — Elderly Property Tax Credit Expansion
Description and Background
The Division expands the existing Homestead Property Tax Credit for Elderly and Disabled to
create a homestead adjustment property tax credit to offset increases in property tax levies of
homesteads owned by persons who are at least 70 years of age and whose annual household
income is not more than 250.0% of federal poverty guidelines published by the U.S. Department
of Health and Human Services. The Bill would apply to claims filed on or after January 1, 2022,
for assessment years beginning on or after January 1, 2021. The Bill exempts the credit
expansion from the provisions of Iowa Code section 25B.7(1) (State requirement to fully fund
changes to property tax credits).
Assumptions
• The average assessed value of an eligible homestead is assumed to be $127,500 for
AY 2020/FY 2022, and the average is assumed to increase 2.0% per year.
• The FY 2020 residential rollback is 56.4094%, and this rollback percentage is used for all
projection years.
• The statewide average residential property tax rate for FY 2021 is $34.44 per $1,000 of
taxed value, and this rate is used for all projection years.
• The combination of the first three assumptions results in a projected property tax increase of
about $50 per year for the average eligible homestead.
• The Department of Revenue estimates that the number of homesteads owned by persons
aged 70 or over with household income of less than 250.0% of the federal poverty level is
106,220 for FY 2022. The LSA estimates that 95.0% of eligible homestead owners will
apply for the property tax credit. The LSA further estimates that a number equal to 2.7% of
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 the FY 2022 estimate of 106,220 (2,868) claims will be received each year from homestead
owners turning 70 years of age that year.
• The current elderly property tax credit component has a cost to the State of approximately
$4.7 million per year. This estimate assumes that amount will remain constant in future
years, and further assumes that 85.0% of the credit calculation for the proposed expansion
represents homestead owners who are eligible under current law ($4.0 million of the
$4.7 million).
• Since the Bill makes the expansion of the property tax credit not subject to the requirement
that the State fully fund new or expanded property tax credits (Iowa Code section 25B.7(1)),
the entire property tax decrease will result in reduced local government property tax
revenue. The combination of the above assumptions results in the following local
government property tax revenue reductions for the first seven years of the new credit:
• FY 2023 = $1.1 million
• FY 2024 = $6.2 million
• FY 2025 = $11.8 million
• FY 2026 = $17.5 million
• FY 2027 = $23.5 million
• FY 2028 = $29.7 million
• FY 2029 = $36.2 million
• The projected local government revenue reduction is projected to continue to increase until
the Iowa population of homeowners aged 70 and over begins to decrease.
Division VI — Future Tax Changes (Income Tax Triggers)
Description
The Division strikes 2018 Iowa Acts, chapter 1161, section 133 (contingent income tax system
trigger requirements), and replaces the section with an unqualified effective date of January 1,
2023.
Background
2018 Iowa Acts, chapter 1161, Division IX, made future changes to how Iowa individual income
tax liability is calculated. The effective date of Division IX of the 2018 legislation is contingent
upon Iowa General Fund revenue reaching two revenue targets, or triggers, at the conclusion of
a fiscal year. The two triggers are:
• Actual General Fund net revenue for the fiscal year equals or exceeds $8,314,600,000.
• Actual General Fund net revenue for the fiscal year equals or exceeds 104.0% of the actual
General Fund net revenue for the previous fiscal year.
Under the provisions of section 133 of the 2018 legislation, the first year that the two targets
may be met is FY 2022, and the first year that the changes in Division IX may become effective
is tax year (TY) 2023.
At the March 2021 meeting of the Revenue Estimating Conference (REC), the REC established
an FY 2022 General Fund estimate of $8,385.6 million and a growth rate of 3.8% compared to
the FY 2021 estimate of $8,078.9 million. The FY 2022 revenue projection is therefore
$71.0 million above the dollar trigger but 0.2 percentage points below the required 4.0% growth
trigger. The REC projection does not mean that both triggers will not or cannot be met at the
conclusion of FY 2022, but it does mean that the triggers are not projected to be met for
FY 2022 at this time.
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Assumptions
• The first fiscal year both triggers may be met under current law is FY 2022, and if both
triggers are met that year, the contingent income tax system becomes effective for TY 2023
and after. However, in March 2021, the REC established a FY 2022 revenue estimate that
does not achieve both triggers at the conclusion of that fiscal year. Therefore, this
projection assumes FY 2023 will be the first year that both triggers are met and the
contingent income tax system will become effective for TY 2024 and after.
• The Department of Revenue utilized the individual income tax micromodel to calculate the
tax reduction associated with the change to the contingent income tax system for TY 2023.
The fiscal impact was determined by comparing model results of tax liability under current
law (existing individual income tax system for TY 2023) versus tax liability under the Bill
(contingent income tax system for TY 2023). Although removing the triggers only directly
changes the tax system for one year (TY 2023), the change also has a projected impact in
TY 2024 as taxpayers adjust for federal tax payments made and refunds received in