Exempting from the individual income tax certain pay received by members of the national guard and including retroactive applicability provisions

Description

House File 2051 exempts from the individual income tax up to $20,000 in annual military pay received under 32 U.S.C. §502 (National Guard required drills and field exercises). The exemption is effective retroactively to January 1, 2022.

Background

Under current law, pay received from the federal government for military service by members of the armed forces, armed forces military reserve, and the National Guard in an active duty status, as defined in U.S.C. Title 10, is exempt from the Iowa individual income tax.

Assumptions

The fiscal impact estimate was developed by the Department of Revenue using the following sources and procedures:

• Data regarding 2021 pay, rank, and time in service was obtained from the Iowa Army National Guard manning roster. The information includes estimates of taxable income and number of personnel at each pay grade.
• Pay schedules beyond 2021 were estimated using the Employment Cost Index (ECI) for military personnel. Projections of the ECI for each year through 2028 are based on consensus forecasts from Moody’s Analytics.
• Personnel numbers for each pay grade through 2028 are assumed to remain unchanged.
• It is assumed that 5.0% of income is earned while deployed on active duty and thus would be exempt under current law.
• State tax liability is estimated on a single taxpayer example basis for each pay grade, with the result multiplied by the total personnel number at that pay grade and then summed across all pay grades.
• Based on the number of Army National Guard and Air National Guard personnel, the Army National Guard amount is multiplied by 27.4% to account for Air National Guard personnel.
• The preceding assumptions concerning the proposed $20,000 income exemption result in a projected annual reduction in taxable income of $86.0 million.
• Tax year 2022 impacts are assumed to fall in FY 2023. For tax years after 2022, 48.0% of the impact is assumed to fall in the fiscal year when the tax year starts and 52.0% in the next fiscal year.
• Tax exemptions lower the statewide yield received through the local option income surtax for schools. The surtax reduction is assumed to equal 2.6% of the projected amount of the State income tax reduction.

Fiscal Impact

The proposed exemption of up to $20,000 in annual National Guard drill and field exercise pay is projected to decrease tax liability and State General Fund revenue by $8.1 million for FY 2023 and $5.6 million for FY 2024. The reductions are projected to increase in future fiscal years by the annual rate of increase in the ECI.

The tax exemption is also projected to reduce the statewide yield from the local option income surtax for schools by $211,000 in FY 2023 and $150,000 for FY 2024 and after.

Sources

• Department of Revenue
• Iowa Army National Guard
• Employment Cost Index