Fiscal Note
Fiscal Services Division
HF 2705 – Individual Income Tax, Reduction (LSB6382HV)
Staff Contacts: Austin Brinks (515.725.2200) austin.brinks@legis.iowa.gov
Evan Johnson (515.281.6301) evan.johnson@legis.iowa.gov
Michael Peters (515.281.6934) michael.peters@legis.iowa.gov
Eric Richardson (515.281.6767) eric.richardson@legis.iowa.gov
Fiscal Note Version – New
Description
House File 2705 has nine divisions and modifies the individual and alternate income tax rates,
withholding credits, franchise tax deductions, and property tax procedures; changes methods of
determining compensation of county officials, makes contingent transfers from the Taxpayer
Relief Fund (TRF); and makes corrections to the Iowa Code. The Bill has retroactive provisions.
Division I — Individual and Alternate Income Tax Rates in Tax Year 2025
Description and Background
Division I of the Bill decreases individual income tax rates beginning in tax year (TY) 2025.
Division I makes the following changes:
• Eliminates the bracketed individual income tax rates that go into effect in TY 2025 and
establishes flat individual income tax rates of 3.8% for tax years beginning on or after
January 1, 2025. Currently, a flat individual income tax rate of 3.9% is scheduled to go into
effect beginning in TY 2026.
• Eliminates references to calculating the latest cumulative inflation factors in Iowa Code
chapter 422 due to removing income tax brackets.
• Decreases the future alternate income tax rate from 4.4% to 4.3% beginning in tax years on
or after January 1, 2025.
• Requires the rate of withholding for tax years beginning on or after January 1, 2025, to not
be higher than the tax rate in effect for the applicable tax year.
Division I is effective January 1, 2025, and applies to tax years beginning on or after January 1,
2025.
Current individual income tax rates for TY 2024, TY 2025, and for tax years beginning January
1, 2026, were set in 2022 Iowa Acts, House File 2317 (Income Tax Rate Reduction and
Exemptions Act). Figure 1 details current and proposed tax rates for single filers in the Bill by
TY, while Figure 2 details current and proposed tax rates for married filers by TY.
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 Figure 1 — Individual Income Tax Rates (Single Filer)
Current Law HF 2705
Income — Single
Filer TY 2024 TY 2025 TY 2026+ TY 2024 TY 2025+
$0 to $6,210 4.40% 4.40% 4.40%
$6,210 to $31,050 4.82% 3.90% 4.82% 3.80%
4.82%
$31,050+ 5.70% 5.70%
Figure 2 — Individual Income Tax Rates (Married Filers)
Current Law HF 2705
Income —
Married Filers TY 2024 TY 2025 TY 2026+ TY 2024 TY 2025+
$0 to $12,420 4.40% 4.40% 4.40%
$12,420 to $62,100 4.82% 3.90% 4.82% 3.80%
4.82%
$62,100+ 5.70% 5.70%
Assumptions/Fiscal Impact (Division I)
• The tax reduction estimate is based on income tax returns filed for TY 2022 and is time-
adjusted for previously enacted State and federal law changes, as well as personal income
and population changes that are projected to occur after the 2022 base tax year.
• Temporary federal law changes under the Tax Cut and Jobs Act of 2017 are assumed to
expire after TY 2025. The Iowa individual income tax revisions under 2018 Iowa Acts,
Senate File 2417 (Income and Sales Tax Modification Act), and 2022 Iowa Acts, House File,
2317, are incorporated as current law for applicable years.
• Iowa withholding decreases would begin in January 2025, affecting FY 2025 revenue;
however, the majority impact of TY 2025 income tax rate decreases would be realized in
FY 2026.
• Tax year results are converted to fiscal year estimates using historical relationships between
income tax withholding, estimate payments, tax refunds, and payments with filed tax returns.
• 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.
The individual income tax rate changes in HF 2705 are projected to decrease net individual
income tax liability and State General Fund revenue by the following amounts:
• FY 2025 = $328.2 million
• FY 2026 = $605.3 million
• FY 2027 = $97.0 million
• FY 2028 = $96.8 million
• FY 2029 = $99.5 million
• FY 2030 = $102.4 million
The decrease in tax liability is also projected to decrease the statewide local option income
surtax for schools by the following amounts:
• FY 2025 = $8.1 million
• FY 2026 = $15.0 million
• FY 2027 = $2.4 million
• FY 2028 = $2.4 million
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• FY 2029 = $2.5 million
• FY 2030 = $2.5 million
Division II — Targeted Jobs Withholding Credit
Description and Background
Division II of the Bill makes changes to the Targeted Jobs Withholding Tax Credit. Division II
makes the following changes:
• Increases the investment necessary for a business to qualify for the credit from $500,000 to
$1.0 million.
• Extends the ability of the Iowa Economic Development Authority (IEDA) to enter into a
targeted jobs withholding agreement by three years, from June 30, 2024, to June 30, 2027.
• Changes the annual compliance reporting to the IEDA about the targeted jobs withholding
agreement from the pilot project city to the employer.
The Targeted Jobs Withholding Tax Credit was created in 2006 as an economic incentive tool
available in a small number of cities for a limited time. The availability of the credit has been
extended several times. The incentive tool is funded through individual income tax withholding.
Instead of remitting income tax withholding from certain employees to the State General Fund,
the employer forwards the withholding tax to the city to finance a project related to the employer
pursuant to an agreement between the employer and the pilot project city. Under current law,
the authority for employers and pilot project cities to enter into new agreements expires June
30, 2024.
Assumptions/Fiscal Impact (Division II)
• Based on historical award data, it is estimated that $4.0 million will be awarded each year
for FY 2025 through FY 2027.
• Based on historical claim data, the credit redemption pattern, in the form of retained
withholding tax from employee paychecks, will be:
• First fiscal year = 3.0%
• Second fiscal year = 5.0%
• Third through eleventh fiscal year = 8.0% per year
• Awarded credits that are never redeemed = 20.0%
Extending the Targeted Jobs Withholding Pilot Project by three additional years is projected to
reduce General Fund revenue by the following amounts:
• FY 2025 = $120,000
• FY 2026 = $320,000
• FY 2027 = $640,000
• FY 2028 = $840,000
• FY 2029 = $960,000
• FY 2030 = $960,000
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Division III — Franchise Tax — Investment Subsidiaries
Description and Background
Division III of the Bill:
• Allows the deduction of expenses allocable to investment in an investment subsidiary for
purposes of the franchise tax.
• Allows a financial institution with an investment subsidiary to elect to include the income and
expenses of the investment subsidiary on a franchise tax return.
• Requires the inclusion of income and expenses of the investment subsidiary on all
subsequent franchise tax returns as long as the investment subsidiary remains a subsidiary
of the financial institution.
• Specifies if the financial institution requests the filing of separate returns and the director of
the Iowa Department of Revenue (IDR) determines separate returns will more clearly
disclose the taxable income, the financial institution may file a separate return from the
investment subsidiary.
Division III of the Bill is effective for tax years beginning on or after January 1, 2025.
The deduction of expenses allocable to investment in a subsidiary was previously eliminated in
1995 Iowa Acts, chapter 193 (Franchise Tax on Financial Institutions Act), which required
financial institutions to pay the franchise tax when depositing certain kinds of investments in
subsidiary corporations.
Assumptions/Fiscal Impact (Division III)
• The Bill is not expected to have an impact on banks as use of investment subsidiaries is
optional.
• Any fiscal estimate is dependent on the extent to which banks choose to open investment
subsidiaries to elect the deduction associated with investment in subsidiaries for purposes of
reducing the franchise tax.
• The IDR cannot estimate the fiscal impact of Division III due to a lack of information but
believes Division III may result in either less or more franchise tax revenue to the General
Fund, dependent on taxpayer actions that cannot be predicted.
• The estimated fiscal impact from 1995 Iowa Acts, chapter 193, was a gain in tax revenue of
approximately $8.0 million annually to the General Fund.
• TY 2025 franchise tax revenue is expected to affect FY 2026 revenue.
The fiscal impact of Division III of the Bill cannot be determined due to a lack of information.
Division IV — Property Tax Procedures
Description and Background
Division IV makes the following modifications to property tax procedures and statements found
in Iowa Code section 24.2A:
• Changes the deadline for political subdivisions to file reports with the Department of
Management (DOM) from March 15 to 4:00 p.m. on March 5 containing all necessary
information for the DOM to compile and calculate amounts required to be included in the
statements sent out to property tax owners and taxpayers in that subdivision. If a city or
county fails to meet the deadline, that city’s or county’s tax levy is limited to the previous
year’s budget amount.
• Changes the deadline for county auditors to send an individual statement containing
information relating to property taxes from March 20 to March 15.
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 • Changes the property tax statements example property on the statement from an
assessed value of $100,000 to $300,000 in assessed value for residential and
commercial properties. This change applies to all fiscal years on or after July 1, 2025.
The bill also changes the amount used for residential and commercial property in the
budget year to 110.0% of the value of the property used as the current fiscal year
example.
• On or after July 1, 2024, statements must include a percent change in property taxes
owed from the current fiscal year example to the budgeted year example.
• Requires that all statements include a link to the DOM’s Internet site. This requirement
is retroactive to January 1, 2024.
Division IV amends requirements related to public hearings for political subdivision’s proposed
property tax amount found in Iowa Code section 24.2A.
Division IV repeals the 1848 Iowa Acts, First Extraordinary Session, chapter 52, which required
Lee County to maintain a district court at Fort Madison and the city of Keokuk. The Act also
required the clerk of district court and the sheriff of Lee County to keep offices at both Fort
Madison and the city of Keokuk.
Division IV allows a city to levy at a rate not to exceed $8.10 per $1,000 of assessed valuation
for its general fund levy if the city's actual levy rate for the current fiscal year is $0 per $1,000 of
value and the total assessed value used to calculate taxes for that budget year exceeds
102.75%. This provision is effective upon enactment.
Counties may collect taxes for a fiscal year for which no budget has been certified for the
county, but the Bill prohibits the county from distributing any funds collected until the county
certifies its budget and transmits the certified budget to the county auditor. Division IV allows
the DOM to make exemptions to this requirement on a case-by-case basis.
A municipality with a population equal to or greater than 15,000 using tax increment financing
for purposes of public improvements related to housing is limited to tax collection of a maximum
of 10 fiscal years. The Bill allows a municipality of any size to extend its urban renewal area tax
collections for three additional years if the project for which revenue is being divided was
established prior to January 1, 2018, to adequately fund the project. All governing bodies of the
taxing district affected must approve the extension, and this provision of this Bill takes effect
upon enactment.
Division IV requires that the county recorder, county treasurer, county assessor, city assessor,
or other government body maintain confidentially the names, addresses, and dates of birth of
persons receiving the 65+ homestead tax exemption.
Taxing district assessors are required to report to the county auditor, in a manner that is
compatible with the county auditor's software, the valuations and revaluations in their taxing
district as instructed by the DOM.
2023 Iowa Acts, chapter 71, requires the director of the DOM to annually prepare and file a
report by December 1 with the General Assembly. Division IV changes the county and city
bond issuance reporting deadline for the DOM from December 1 to no later than January 1.
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Assumptions/Fiscal Impacts (Division IV)
DOM
The fiscal impact to the Department of Management will be approximately $20,000 for
technology changes and updates to the existing software system. The expenses would be paid
for out of existing Rebuild Iowa Infrastructure Fund/Technology Reinvestment Fund (RIIF/TRF)
funding for the local government systems appropriation to the Department of Management.
Lee County District Court and Sheriff Offices
The closure of the City of Keokuk clerk of district court and the sheriff of Lee County offices may
generate local savings. The LSA is unable to estimate the local impact.
City Levy Rates
2023 Iowa Acts, House File 718, restricted cities that received zero property taxes and had a
$0.0 tax rate from levying rate increase unless the cities assessed value grew less than 3.0% in
terms of taxable value. Cities that grew more than 3.0% would not be allowed to tax real
property in FY 2025.
In FY 2024, there were seven cities that would be prevented from raising their rates in FY 2025.
Of those cities, four incurred taxable growth in excess of 3.0% and would be eligible to increase
rates and collect property taxes in FY 2025 under this Division. This Bill would generate an
additional $145,000 in statewide property tax revenue. Cities affected include:
• Bagley — Increased FY 2025 taxable property growth by 5.8%, which generates $34,000 in
additional revenues.
• Pleasanton — Increased FY 2025 taxable property growth by 10.6%, which generates
$5,000 in additional revenues.
• Sageville — Increased FY 2025 taxable property growth by 16.8%, which generates
$83,000 in additional revenues.
• Zwingle — Increased FY 2025 taxable property growth by 11.1%, which generates $23,000
in additional revenues.
Tax Increment Financing (TIF)
The FY 2023 Annual Urban Renewal Report identified a total of 84 low- and moderate-income
housing-related projects. Of those projects, 53 were created prior to January 1, 2018, with a
total balance of $11.3 million. It is unknown how many of these TIFs may utilize this program,
and the impact on local property taxes cannot be estimated.
Division V — Compensation of Elected County Officials
Description and Background
Division V of the Bill does the following:
• Requires a majority vote from a board of county supervisors to change the compensation
schedule of elected county officials if a compensation board does not exist.
• Allows a board of county supervisors to dissolve or create a county compensation board
upon a majority vote of the members of the board and requires the board of supervisors to
annually prepare and review a compensation schedule if a compensation board does not
exist.
• Requires the salary of a county sheriff to be comparable to salaries paid to professional law
enforcement administrators and command officers of the State Patrol, the Division of
Criminal Investigation of the Department of Public Safety (DPS), and city police chiefs in
cities of a similar population to the population of the county.
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• Requires a county compensation board to provide documentation to the board of
supervisors demonstrating how the compensation board determined its recommended
compensation schedule.
• Allows a board of supervisors to set compensation of a position at less than compensation
provided in the current compensation schedule if the position is reduced to part-time.
Fiscal Impact
Division V is not expected to have a fiscal impact.
Division VI — County and City Tax Levy Rate Adjustments
Description and Background
Division VI makes changes to the limits on county and city property taxes rates established in
2023 Iowa Acts, House File 718 (Property Tax, Assessments, and Bond Elections Act). House
File 718 consolidated property tax rates for limits to allow rate adjustment by the growth of that
local taxing districts property assessments into a new combined general fund levy (CGFL rate).
Current Law Under HF 718
House File 718 made the following county changes, which are impacted by Division VI:
• Consolidates several county functions that were previously financed through a combination
of genera