Bill Summary – FastDemocracy

Fiscal Note
                                        Fiscal Services Division
HF 2650 – Business Expense Deductions, Medical Cannabidiol (LSB5498HV)
Staff Contact: Eric Richardson (515.281.6767) eric.richardson@legis.iowa.gov
Fiscal Note Version – New
Description
House File 2650 allows a medical cannabidiol manufacturer and a medical cannabidiol
dispensary to deduct business expenses from individual income tax or corporate income tax.
The Bill is retroactively effective to January 1, 2021, for tax years beginning on or after that date.
Background
Section 280E of the Internal Revenue Code disallows any deductions or tax credits to the net
income of any taxpayer for any amount paid or incurred for businesses and activities associated
with trafficking in controlled substances under Schedules I and II of the Controlled Substances
Act, which includes extracted cannabidiols.
Iowa Code chapter 124E was enacted in 2017 Iowa Acts, chapter 162 (Medical Cannabidiol
Act), and allows licensed dispensaries to provide cannabidiols for medical purposes as
administered by the Department of Health and Human Services (HHS). As of October 2023, the
program has authorized approximately 18,100 active patient cardholders for medical
cannabidiol products from Iowa’s licensed dispensaries.
Assumptions
• Gross income for individuals and corporations from the production and sale of medical
   cannabidiol is equal to gross sales from Iowa’s medical cannabidiol dispensaries. Data on
   taxable sales of medical cannabidiol from dispensaries comes from HHS monthly reports.
• The Iowa Department of Revenue estimates that business expenses in the production and
   sale of medical cannabidiol will be the same as average levels of business expenses for
   other Iowa corporations, or 28.9% of gross income.
• The effective tax rate for impacted individual and corporate taxpayers is assumed to be as
   follows for each tax year:
   • Individual income taxpayers:
        • Tax year (TY) 2021 — 5.9%
        • TY 2022 — 5.9%
        • TY 2023 — 5.0%
        • TY 2024 — 5.0%
        • TY 2025 — 4.7%
        • TY 2026 and after — 3.9%
   • Corporate income taxpayers:
        • TY 2021 — 9.8%
        • TY 2022 — 9.8%
        • TY 2023 — 8.4%
        • TY 2024 — 7.1%
        • TY 2025 — 6.4%
        • TY 2026 and after — 5.5%
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•   The number of active registration cards for medical cannabidiol issued to patients in
    TY 2024 and beyond will remain the same.
•   Medical cannabidiol taxable sales in TY 2024 through TY 2029 are estimated to increase by
    2.0% annually.
•   There is no available information on the ownership structures of cannabidiol dispensaries.
    This Fiscal Note assumes that dispensary ownership is divided equally between
    corporations and pass-through entities (with individual owners), and 50.0% of the fiscal
    impact will occur against the corporate income tax and 50.0% will occur against the
    individual income tax.
•   The income surtax for schools is a local option tax that is based on a taxpayer’s Iowa
    income tax liability. Law changes that lower Iowa income tax liability also lower the amount
    of income surtax owed by any taxpayer subject to the surtax. For this projection, the surtax
    is assumed to equal 2.5% of State individual income tax liability.
•   TY 2021 through TY 2024 combined will impact FY 2025. For other tax years, all tax year
    impacts are assumed to occur in the subsequent fiscal year.
Fiscal Impact
The individual income tax rate changes in House File 2650 are projected to decrease State
General Fund revenue by the following amounts:
• FY 2025 = $900,000
• FY 2026 = $200,000
• FY 2027 = $200,000
• FY 2028 = $200,000
• FY 2029 = $200,000
• FY 2030 = $200,000
The decrease in tax liability is also projected to decrease the statewide local option income
surtax for schools by the following amounts:
• FY 2025 = $9,000
• FY 2026 = $2,000
• FY 2027 = $2,000
• FY 2028 = $2,000
• FY 2029 = $2,000
• FY 2030 = $2,000
Sources
Iowa Department of Revenue
Iowa Department of Health and Human Services
Legislative Services Agency analysis
                                                                               /s/ Jennifer Acton
                                                                                 March 8, 2024
Doc ID 1447845
The fiscal note for this Bill was prepared pursuant to Joint Rule 17 and the Iowa Code. Data used in developing this
fiscal note is available from the Fiscal Services Division of the Legislative Services Agency upon request.
                                                 www.legis.iowa.gov
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Statutes affected: 
Introduced: 422.7, 422.35