Bill Summary – FastDemocracy

Fiscal Note
                                      Fiscal Services Division
SF 214 – Income Tax Exemption, Pandemic Payments (LSB1862XS)
Staff Contact: Jeff Robinson (515.281.4614) jeff.robinson@legis.iowa.gov
Fiscal Note Version – New
Description
Senate File 214 excludes unemployment insurance (UI) payments received through several
recent federal programs from Iowa taxable income when computing income tax liability. The
changes are retroactive to January 1, 2020, and apply to tax years (TY) 2020 and 2021. The
federal programs included in the exemption are:
• Pandemic Unemployment Assistance (PUA).
• Pandemic Emergency Unemployment Compensation (PEUC).
• Unemployment compensation approved by Presidential declaration and known as Lost
   Wages Assistance (LWA).
• The extension of PUA and PEUC approved by Congress in December 2020.
Background
The distribution of UI payments is a function of the Iowa Department of Workforce Development.
Payments to qualified individuals are made weekly. The large increase in weekly UI payments
began in mid-March 2020, when Congress enacted the federally funded emergency programs.
With the recent extensions approved by Congress in December 2020, the emergency programs
are available to qualified individuals through mid-March 2021.
Unemployment insurance recipients may choose to have federal and State income tax withheld
from the payments they receive. If a recipient chooses Iowa withholding, the amount withheld is
equal to 5.0% of the payment. If the recipient chooses to not have income tax withheld, any tax
due on the UI income is resolved when the tax return for the year is filed.
Assumptions
• The taxpayer benefit from this exemption will be realized through lower individual income tax
   liability when filing TY 2020 and TY 2021 income tax returns. For some taxpayers, an
   amended TY 2020 filing will be necessary.
• The average marginal income tax rate for persons receiving UI payments is projected by the
   Department of Revenue to equal 5.25%.
• The reduction in State income tax liability will result in a reduction in the amount owed for
   any local option income surtax for schools. The statewide average surtax rate is 3.0% of
   State income tax liability.
• The total amount of UI payments subject to the proposed income tax exemption is
   calculated to be $966.4 million.
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                                Unemployment Insurance Income
                            Impacted by the Proposed Tax Exemption
                                                  In Millions
                                     PUA             PEUC              LWA           Total
                  TY 2020        $    173.9      $    185.9        $    156.9    $    516.7
                  TY 2021        $   216.3       $    231.7        $      1.7    $    449.7
                  Total          $   390.2       $    417.6        $    158.6    $    966.4
Fiscal Impact
Exempting federal emergency UI payments from the State income tax is projected to reduce
General Fund revenue by the following amounts:
• FY 2021 = $27.1 million
• FY 2022 = $23.6 million
There is no projected impact beyond FY 2022. The statewide yield from the local option income
surtax for schools will be reduced by a projected $1.5 million across the two fiscal years.
Tax returns for TY 2020 filing season begins in mid-February 2021. Exempting the UI income
from income tax for TY 2020 will require changes to tax forms, instructions, and programs. It is
likely that this change will result in a significant number of TY 2020 amended returns and that
will increase the administration costs of the Department of Revenue.
Additional Potential Fiscal Impact
Existing Iowa law provides for a significant change to Iowa’s individual income tax system once
two General Fund revenue triggers are met. The first year that the triggers may be met is at the
conclusion of FY 2022. Once implemented, this contingent income tax system is projected to
reduce Iowa individual income tax by roughly $300.0 million per tax year. Since this Bill is
projected to reduce General Fund revenue in FY 2022, the Bill’s changes will reduce the
probability of achieving both revenue triggers; as a consequence, the Bill could result in delayed
implementation of the income tax reduction by one tax year.
Sources
Department of Workforce Development
Department of Revenue
                                                                            /s/ Holly M. Lyons
                                                                            February 15, 2021
Doc ID 1212377
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