Fiscal Note
Fiscal Services Division
SF 2206 – Income, Sales, and Tax Credit Modifications (LSB5099SV)
Staff Contacts: Jeff Robinson (515.281.4614) jeff.robinson@legis.iowa.gov
Lora Vargason (515.725.2249) lora.vargason@legis.iowa.gov
Fiscal Note Version – New
Description
Senate File 2206 relates to taxation, tax credits, and State and local finance. Provisions of the
Bill have various effective dates. Tables 3 and 4 summarize the fiscal impacts of the various
Bill divisions and can be found at the end of this fiscal note.
Divisions I Through IV — Sales/Use Tax Rate Increase and Tax Base Expansion
Description and Background
The Bill increases the sales/use tax rate 1.0 percentage point to 7.0%. One percentage point of
the sales/use tax collected will be distributed to local school districts for the program known as
Secure an Advanced Vision for Education (SAVE). The Bill eliminates the Local Option Sales
Tax (LOST) but specifies that 1.0% of the sales/use tax collected will be deposited into the
Local Sales and Use Tax Fund to be distributed to the county from which the tax was collected.
The increased sales/use tax rates are effective January 1, 2023, through December 31, 2050.
Increasing the sales tax rate triggers the funding of the Natural Resources and Outdoor
Recreation Trust Fund (Trust Fund) so a portion of the revenue generated by the change must
be used for the purposes of the Trust Fund.
The Bill makes the following changes to the sales tax base effective January 1, 2023:
• Replaces “software as a service” with “cloud computing” for purposes of imposing the sales
tax.
• Makes web hosting and digital automated services subject to the sales tax.
• Exempts cloud computing, web hosting, and digital automated services purchased for use
by commercial enterprises from the sales tax.
• Makes scooter rental services subject to the sales tax.
• Eliminates the sales/use tax exemption on the sales price from the sale or rental of
computer or computer peripherals by an insurance company, financial institution, or
commercial enterprise.
• Removes “professionals and occupations” from the definition of “commercial enterprise”
making sales to professions and occupations related to prewritten software, specified digital
services, and other services subject to the sales tax.
The Bill allows a taxpayer to have a combined sales and use tax permit and to file a combined
sales and use tax return. The Bill directs the Department of Revenue to distribute the LOST
based on actual tax remitted rather than estimates.
Assumptions/Fiscal Impact (Divisions I Through IV)
• The Department estimates that sales/use tax revenue will increase 3.6% in FY 2023, 3.0%
in FY 2024, 2.7% in FY 2025, 2.6% in FY 2026, 3.0% in FY 2027, and 3.0% in FY 2028.
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 Those Department estimates are used for calculations of those fiscal years. The tax
increase associated with the increased sales/use tax rate along with changes to items
added to the base and the removal of exemptions is shown in Table 1.
Table 1 — Increase in Sales/Use Tax Collected
In Millions
Professions and Remove Exemption Sales/Use Tax Total Projected
Scooter Occupations for Purchase for Computers and Water Rate Increase to Increase to Sales/Use
Rentals of Digital Goods Peripherals Sales 7.0% Tax Collected
FY 2023 $ 0.0 $ 1.4 $ 34.6 $ 23.9 $ 315.0 $ 374.9
FY 2024 0.1 3.0 69.9 49.1 650.5 772.5
FY 2025 0.1 3.1 71.6 50.6 668.0 793.5
FY 2026 0.1 3.2 72.2 52.1 685.6 813.2
FY 2027 0.1 3.4 69.7 53.7 705.9 832.8
FY 2028 0.1 3.6 66.2 55.3 727.0 852.1
The FY 2023 amount is for one-half of the fiscal year.
Totals may not add due to rounding.
• The increased collection of sales/use tax due to changes in the base will increase the
projected revenue for SAVE. The Department projects increases to SAVE revenue by the
following amounts:
• FY 2023 = $8.3 million (for one-half of the fiscal year)
• FY 2024 = $16.9 million
• FY 2025 = $17.3 million
• FY 2026 = $17.6 million
• FY 2027 = $17.5 million
• FY 2028 = $17.3 million
• The net fiscal impact to counties due to the elimination of the LOST and increase in
sales/use tax collections transferred to the Local Sales and Use Tax Fund is shown in
Table 2.
Table 2 — Elimination of LOST and Transfer to the Local Sales and Use Tax Fund
In Millions
Transfer to the Local Total Projected Net Transfer
Elimination of LOST Sales and Use Tax Fund Increase to Counties
FY 2023 $ -290.0 $ 313.6 $ 23.6
FY 2024 -597.6 645.9 48.3
FY 2025 -613.4 663.1 49.6
FY 2026 -629.4 680.1 50.8
FY 2027 -659.8 699.2 39.4
FY 2028 -667.1 719.5 52.4
The FY 2023 amount is for one-half of the fiscal year.
Totals may not add due to rounding.
• Article VII, section 10, of the Iowa Constitution specifies an increase in the sales tax rate as
the condition necessary to trigger the funding requirements of the Trust Fund. The text of
this Constitutional amendment is reprinted at the end of this Fiscal Note. The Constitution
requires that an amount equal to the revenue raised by a tax rate of three-eighths of 1.0% is
required to be deposited into the Trust Fund. The use tax is not mentioned in the relevant
language of the Constitution. The Department calculations for transfers to the Trust Fund
do not include consumer’s use tax or retailer’s use tax. The amounts for transfers to the
Trust Fund also do not include State hotel/motel tax, auto rental tax, construction equipment
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 tax, and tax on specified digital products. Transfers to the Trust Fund are estimated to be
the following amounts:
• FY 2023 = $92.9 million (for one-half of the fiscal year)
• FY 2024 = $191.4 million
• FY 2025 = $196.4 million
• FY 2026 = $201.5 million
• FY 2027 = $207.1 million
• FY 2028 = $213.2 million
Division V — Stock Capital Gains Income Tax Exemption
Description and Background
The Bill exempts capital gains earned through the sale or exchange of capital stock in a
qualified corporation. The exemption is available to taxpayers defined under the Bill as
employee-owners and applies to stock in a qualified company that was acquired while employed
by and on account of employment with the qualified company. The Bill grants one irrevocable
lifetime election to exclude such capital gains income and the exemption is phased in over three
calendar years. The change is effective beginning with calendar year (CY) 2023, and 33.0% of
any qualified capital gains will be exempt for that year while 66.0% will be exempt for CY 2024.
Beginning with CY 2025, qualified sales will be fully exempt from Iowa individual income tax.
Assumptions/Fiscal Impact (Division V)
The Department based the stock capital gains fiscal impact projection on a similar provision of
Nebraska tax law that has been in place for a number of years. The Department extrapolated
the Iowa estimate from available estimates of the Nebraska law’s impact on that state’s tax
revenue, with adjustment factors for differences in the proposal, state tax rates, and size of the
two states’ corporate sectors.
The Department projects that the stock capital gains income tax exemption will reduce tax
liability and General Fund revenue by the following amounts:
• FY 2024 = $4.0 million
• FY 2025 = $7.6 million
• FY 2026 = $10.3 million
• FY 2027 = $8.9 million
• FY 2028 = $8.8 million
Fiscal impacts beyond FY 2028 are projected to continue, increasing each year at the rate of
inflation. The Department’s fiscal impact projection assumes the tax rates and retirement
income exemption changes also included in this Bill. This means that if the stock capital gains
provisions were estimated separately from the Bill’s other provisions, the fiscal impact would be
higher.
Division VI — Farm Lease Income Tax Exemption
Description and Background
The Bill exempts total net income received by a retired farmer pursuant to a farm tenancy
agreement covering real property if the retired farmer held the property for 10 years or more and
materially participated in a farming business for 10 years or more. To be eligible, a retired
farmer must be 55 years of age or older and must no longer materially participate in farming.
The exemption is effective beginning January 1, 2023.
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Assumptions/Fiscal Impact (Division VI)
The Department based the farm lease income tax exemption fiscal impact projection on federal
Internal Revenue Service (IRS) data covering taxpayers who filed electronically and met all of
the following three criteria:
• Reported net farm rental income.
• Filed IRS schedule F for the past 10 years.
• One or both taxpayers on the return were age 55 or older.
In addition, the Department further adjusted numbers and amounts to account for retired
farmers identified who are currently utilizing the Beginning Farmer Tax Credit since the Bill
prohibits utilizing both that credit and this new exemption. The Department analysis concluded
that 1,295 returns will qualify each year for the new exemption, with combined annual farm
lease income of $37.8 million (an average of $29,157 per return).
The Department projects that the farm lease income tax exemption will reduce tax liability and
General Fund revenue by the following amounts:
• FY 2024 = $2.1 million
• FY 2025 = $2.0 million
• FY 2026 = $1.8 million
• FY 2027 = $1.5 million
• FY 2028 = $1.5 million
Fiscal impacts beyond FY 2028 are projected to continue, increasing each year at the rate of
inflation. The Department’s fiscal impact projection assumes the tax rates and retirement
income exemption changes also included in this Bill. This means that if the farm lease income
tax exemption provisions were estimated separately from the Bill’s other provisions, the fiscal
impact would be higher.
Division VII — Farm Capital Gains Income Tax Exemption
Description and Background
The Bill expands the farm capital gains income exemption, which is available beginning tax year
(TY) 2023 on the sale of real property used in a farming business and the sale of cattle, horses,
and breeding livestock. The changes expand the qualifying time frame for retired farmers to
have materially participated in farm operations. The exemption is effective beginning January 1,
2023, and applies to sales consummated on or after that date.
Assumptions/Fiscal Impact (Division VII)
The Department utilized the following facts, sources, and assumptions to estimate the fiscal
impact of the Division:
• The Bill requires that a taxpayer choose between the lease income exemption contained in
Division VI and the capital gains exemption. It is assumed that taxpayers with this choice
will choose the ongoing lease income exemption instead of the capital gains exemption.
• The Bill prohibits taxpayers from benefiting from this new tax exemption during a tax year in
which they claim the Beginning Farmer Tax Credit. The Department’s estimate adjusts for
this interaction.
• Current Iowa law allows a farmer to exempt from taxable income certain capital gains from
the sale of real property used in a farm business (reported on Form IA 100B). This Bill
expands the narrow area of farm capital gains exemptions available under current law. The
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 Department assumes that an additional 948 retired farmers will benefit from the capital gains
exemption each year, with a total exempted annual income amount of $113.1 million.
• Current Iowa law allows a farmer to exempt from taxable income the certain capital gains
from the sale of cattle, horses, and breeding livestock (reported on Form IA 100A). This Bill
expands the narrow area of capital gains exemptions available under current law. The
Department assumes that an additional 230 retired farmers will benefit from the capital gains
exemption each year, with a total estimated annual exempted income amount of
$25.7 million.
The Department projects that the farm capital gains income tax exemption will reduce tax
liability and General Fund revenue by the following amounts:
• FY 2024 = $7.2 million
• FY 2025 = $6.9 million
• FY 2026 = $6.1 million
• FY 2027 = $5.1 million
• FY 2028 = $5.3 million
Fiscal impacts beyond FY 2028 are projected to continue, increasing each year at the rate of
inflation. The Department’s fiscal impact projection assumes the tax rates and retirement
income exemption changes also included in this Bill. This means that if the farm capital gains
income tax exemption provisions were estimated separately from the Bill’s other provisions, the
fiscal impact would be higher.
Divisions VIII, IX, and X — Income Tax Rate Reductions and Retirement Income Tax
Exemption
Description and Background
The Bill reduces Iowa individual income tax rates annually for TY 2023 through TY 2025, and
establishes a single tax bracket/rate for TY 2026 and after. Under existing law, Iowa’s TY 2023
and after top individual income tax rate is 6.50%. The Bill reduces the top tax rate to 6.00% for
TY 2023, 5.70% for TY 2024, 4.82% for TY 2025, 3.85% for TY 2026, and 3.60% for TY 2027
and after. The number of brackets and the bracket income levels are also reduced over the
years. Corresponding reductions are made in the alternate tax rate that may apply in situations
related to a taxpayer’s qualification for Iowa’s universal and age-based low-income exemptions
from the individual income tax (Iowa Code sections 422.5(3) and 422.5(3B).
Division IX also provides for a contingent individual income tax rate reduction process that
begins with TY 2029. This process and the fiscal implications are discussed in the following
section of this Fiscal Note.
Division VIII (income tax rate reductions through TY 2025) takes effect January 1, 2023.
Division IX (single bracket/rate) takes effect January 1, 2026.
Iowa’s TY 2022 top individual income tax rate is 8.53%, and that rate applies to taxable income
over $78,435. Under provisions enacted in 2018 Iowa Acts, chapter 1161, Iowa’s current-law
income tax rates and brackets will change starting TY 2023. Under this impending change,
Iowa’s top tax rate will be 6.50% and will apply to taxable income exceeding $150,000 for
married couples filing joint returns and $75,000 for all other filing categories. This Bill strikes the
current-law TY 2023 rates and replaces them with lower tax rates and lower tax brackets.
Division X exempts all income defined as retirement income from the State individual income
tax for disabled taxpayers and taxpayers aged 55 years or older. The exemption also applies to
a deceased person’s retirement income that is received by a surviving spouse or a person with
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an insurable interest in the deceased person. The change replaces the current exemption
which is described in the next paragraph. The change does not alter the full retirement pay
exemption available to retired military personnel, which is not based on age or disability. The
Bill also excludes retirement income from the calculation of Iowa’s universal and age-based low-
income full exemptions from individual income tax. The changes are effective beginning
TY 2023.
Current Iowa law allows for a retirement income exemption of up to $6,000 for single filers or
$12,000 for married filers. This exemption is available to disabled taxpayers and taxpayers age
55 and older. Military retirement income received from the federal government and Social
Security income are also fully excluded from Iowa income tax under current law.
Iowa law contains two separate net income thresholds below which low-income taxpayers are
not subject to the Iowa income tax. The first threshold applies to all potential taxpayers and is
generally equal to $9,000 of net income for single taxpayers and $13,500 for married taxpayers,
heads of households, and surviving spouses. This universal low-income threshold generally
does not apply to dependents. In determining whether the taxpayer qualifies for the low-income
threshold and is therefore fully exempt from Iowa income tax, net income includes sources of
income that are not subject to Iowa income tax.
The second threshold is based on higher amounts that apply only to taxpayers who are age 65
or older. The threshold is generally equal to $24,000 of net income for single taxpayers and
$32,000 for married taxpayers, heads of households, and surviving s