Fiscal Note
Fiscal Services Division
HF 2317 – Income Tax Rate Reduction and Exemptions (LSB5798HV.2)
Staff Contact: Jeff Robinson (515.281.4614) jeff.robinson@legis.iowa.gov
Fiscal Note Version – Final Action
Description
House File 2317 reduces Iowa individual income tax rates, creates several new exemptions
from the Iowa individual income tax, reduces corporate income tax rates, and makes changes to
tax credits. Provisions of the Bill have various effective dates. Figure 2 at the end of this
Fiscal Note summarizes the fiscal impacts of the various divisions of the Bill.
Division I — 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 I)
The Department of Revenue (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 = $9.0 million
• FY 2028 = $9.5 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 stock capital gains
provisions were estimated separately from the Bill’s other provisions, the fiscal impact would be
higher.
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Division II — 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.
Assumptions/Fiscal Impact (Division II)
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:
• The taxpayer reported net farm rental income.
• The taxpayer 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 = $1.6 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 III — Farm Capital Gains Income Tax Exemption
Description and Background
The Bill modifies 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 Bill modifies the qualifying time frame for retired farmers to have
materially participated in farm operations. The change to the exemption is effective beginning
January 1, 2023, and applies to sales consummated on or after that date. The Bill specifies that
sales consummated prior to January 1, 2023, shall be governed by the law as it existed prior to
that date.
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Assumptions/Fiscal Impact (Division III)
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 II and the capital gains exemption. It is assumed that taxpayers with this situation
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). The
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 certain capital gains from
the sale of cattle, horses, and breeding livestock (reported on Form IA 100A). 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 Bill specifies that sales consummated prior to January 1, 2023, are governed by law as
it existed prior to that date. Prior to January 1, 2023, the capital gains exemption found in
Iowa Code section 422.7(21) is broader, encompassing the sale of farm and nonfarm
businesses, livestock, breeding stock, timber, and qualified Iowa employee stock ownership
plans.
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 = $5.4 million
• FY 2028 = $5.7 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 IV, V, and VI — 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, and 3.90% for TY 2026 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 IV (income tax rate reductions through TY 2025) takes effect January 1, 2023.
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Division V (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. 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 VI 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
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 spouses. Like the universal
low-income threshold, this age-based threshold generally does not apply to dependents. The
age-based low-income threshold is available to both spouses as long as one spouse is age 65
or older.
The changes in the Bill to the calculation of the two full-exemption thresholds will allow
taxpayers to benefit from the low-income exemptions without regard to the amount of the
taxpayers’ retirement income.
Assumptions/Fiscal Impact (Divisions IV, V, and VI)
The tax reduction estimate was completed by the Department using the individual income tax
micromodel developed by the Department. The micromodel is based on income tax returns
filed for TY 2020 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 2020 base
tax year.
The model results are adjusted to account for persons who pay Iowa income tax through
income tax withholding or other means but do not file Iowa income tax returns. Since the
micromodel is composed of filed income tax returns, it does not account for people who make
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individual income tax payments but then do not file an Iowa income tax return. While not the
only example of payments the State might receive from people who do not file income tax
returns, most of the payments likely arrive in the form of income tax withholding. When the
State lowers income tax rates and/or withholding tables, these nonfilers also receive an income
tax reduction. To account for this and other types of nonfiler income tax payments, the
micromodel results are adjusted based on the Department’s estimate of the amount of nonfiler
income tax revenue the State will receive under current law and under the proposed law.
The micromodel produces tax year basis results. The Department converts tax year results to
fiscal year estimates using historical relationships between income tax withholding, estimate
payments, tax refunds, and payments with filed tax returns. The individual income tax rate
changes and retirement income exemption are projected to reduce net individual income tax
liability and State General Fund revenue by the following amounts:
• FY 2023 = $216.7 million
• FY 2024 = $482.0 million
• FY 2025 = $666.8 million
• FY 2026 = $1,227.4 million
• FY 2027 = $1,651.2 million
• FY 2028 = $1,690.3 million
For years beyond FY 2029, the projected tax liability and State General Fund revenue
reductions are expected to increase at the rate of growth in Iowa personal income.
Income Surtax for Schools — 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 surtax owed by any taxpayer subject to the surtax. For this projection, the
surtax is assumed to equal 2.6% of State individual income tax liability.
Division VII — Research Activities Tax Credit Changes
Description and Background
The Bill makes the following changes to the Research Activities Tax Credit:
• Requires the use of the alternative simplified method of credit calculation for State purposes
if that method was used by the applicant for the federal tax credit.
• Disallows supplies and computer use expenses from being claimed as qualifying expenses
as part of the credit calculation.
• Reduces tax credit refundability by 10 percentage points each tax year through TY 2023.
The first reduction would occur in TY 2023. This process will result in tax credit refundability
equal to 50.0% for TY 2027 and after.
Assumptions/Fiscal Impact (Division VII)
The modifications of the Research Activities Tax Credit are expected to increase Iowa individual
and corporate tax liability and increase State General Fund revenue. The Department utilized
the following assumptions in estimating the fiscal impact of these provisions:
• Based on claims over the past three years, it is assumed that 75.0% of claims are from
corporations and 25.0% are from individuals.
• Based on records for 2010 through 2019, it is assumed that 58.0% of credit claims will utilize
the alternative simplified method and 42.0% will utilize the regular method.
• It is assumed that the disqualification of supplies and computer use expenses will decrease
claims by 25.0%.
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• It is assumed that tax credits that are not allowed for one tax year due to the reduced
refundability provisions will not be allowed as carryforward claims the next tax year.
• The Department estimates that the changes to the Research Activities Tax Credit will
increase individual and corporate income tax liability and State General Fund revenue by
the following amounts:
• FY 2024 = $13.1 million
• FY 2025 = $23.7 million
• FY 2026 = $30.0 million
• FY 2027 = $36.6 million
• FY 2028 = $44.8 million
Fiscal impacts beyond FY 2028 are projected to continue, increasing each year at the rate of
inflation.
Division VIII — Other Tax Credit Changes
Description and Background
The Bill makes changes to several existing tax credit programs:
• High-Quality Jobs Tax Credit — Requires the Economic Development Authority to
prioritize the Research Activities Tax Credit.
• Geothermal Heat Pump Tax Credit — Prohibits the issuance of new awards after
December 31, 2022.
• Endow Iowa Tax Credit — Limits the maximum tax credit dollar amount a single taxpayer
may receive in a year.
• Tax Credit Refundability — Reduces the refundability (tax credits amounts in excess of
taxpayer liability that are refunded to the taxpayer) of certain tax credits by five percentage
points each year for five years. The first reduction would occur in TY 2023. This process
will result in tax credit refundability of 75.0% for TY 2027 and after. The tax credits included
are:
• Assistive Device Tax Credit
• Historic Preservation Tax Credit
• Redevelopment Tax Credit
• Research Activities Tax Credit (supplemental, included in Division VII)
• Third-Party Developer Tax Credit
Assumptions/Fiscal Impact (Division VIII)
The changes to the High Quality Jobs, Geothermal Heat Pump, and Endow Iowa Tax Credits
are not projected to have an identifiable fiscal impact. The changes to tax credit refundability
are projected to increase tax liability and General Fund revenue by the following amounts:
• FY 2024 = $0.4 million
• FY 2025 = $1.3 million
• FY 2026 = $2.5 million
• FY 2027 = $3.6 million
• FY 2028 = $4.9 million
Fiscal impacts beyond FY 2028 are projected to continue, increasing each year at the rate of
inflation. The changes are effective January 1, 2023.
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Divisions IX and X — Corporate Income Tax Rate Reduction