SSB 1276

Description

Senate File 619 relates to State and local taxation, tax policy, and economic incentive programs. The Bill also contains provisions related to:

• Telehealth coverage through health insurance.
• A new Manufacturing 4.0 Technology Investment Program.
• A new Energy Infrastructure Revolving Loan Program.
• A new Downtown Loan Guarantee Program.
• A new Disaster Recovery Housing Assistance Program and Fund.

Provisions of the Bill have various effective dates, including retroactive effective dates. Figures 9, 10, and 11 summarize the fiscal impact of the various Bill divisions and can be found at the end of this fiscal note.

Division I — Contingent Income Tax System Triggers

Description and Background

2018 Iowa Acts, chapter 1161, Division IX, made future changes to how Iowa individual income tax liability is calculated. The effective date of Division IX of the 2018 legislation is contingent upon Iowa General Fund revenue reaching two revenue targets, or triggers, at the conclusion of a fiscal year. The two triggers are:

• Actual General Fund net revenue for the fiscal year equals or exceeds $8,314.6 million.
• Actual General Fund net revenue for the fiscal year equals or exceeds 104.0% of the actual General Fund net revenue for the previous fiscal year.

Under the provisions of section 133 of the 2018 legislation, the first year that the two targets may be met is FY 2022, and the first year that the changes in Division IX of the 2018 legislation may become effective is TY 2023.

At the March 2021 meeting of the Revenue Estimating Conference (REC), the REC established an FY 2022 General Fund estimate of $8,385.6 million and a growth rate of 3.8% compared to the FY 2021 estimate of $8,078.9 million. The FY 2022 revenue projection is therefore $71.0 million above the dollar trigger but 0.2 percentage points below the required 4.0% growth trigger. While the REC projection does not meet the trigger requirements, it does not mean that both triggers will not or cannot be met at the conclusion of FY 2022, but it does mean that the triggers are not projected to be met for FY 2022 at this time.

The Bill amends the 2018 Iowa Acts by striking the two conditions necessary for the trigger to occur and specifies that the provisions in the 2018 law take effect January 1, 2023. Assumptions/Fiscal Impact (Division I)

• The first fiscal year both triggers may be met under current law is FY 2022, and if both triggers are met that fiscal year, the contingent income tax system becomes effective for TY 2023 and after. However, in March 2021, the REC established an FY 2022 revenue estimate that does not achieve both triggers at the conclusion of that fiscal year. Therefore, the current-law projection assumes FY 2023 will be the first year that both triggers are met and that the contingent income tax system will become effective for TY 2024 and after.
• The Department of Revenue utilized the individual income tax micromodel to calculate the tax reduction associated with the change to the contingent income tax system for TY 2023. The fiscal impact was determined by comparing model results of tax liability under current law (existing individual income tax system for TY 2023) versus tax liability under the Bill (contingent income tax system for TY 2023). Although removing the triggers only directly changes the tax system for one year (TY 2023), the change also has a projected impact in TY 2024 as taxpayers adjust for federal tax payments made and refunds received in TY 2024 that relate to TY 2023 and before. The change also has an ongoing impact on income tax brackets as the brackets are established in the contingent system as specific income levels that are then indexed each tax year after the first implementation year. Implementing the contingent tax system one year earlier will mean that tax brackets are lower by one year’s worth of indexing for all future years. The Department model estimates the TY 2023 change will reduce State individual income tax liability by the following amounts:
• TY 2023 = $297.6 million
• TY 2024 = $43.7 million
• TY 2025 and after = $8.0 million per tax year
• The tax year impacts are assumed to be distributed 52.0% to the fiscal year that ends during the tax year through reduced withholding and estimate payments, and 48.0% to the succeeding fiscal year through reduced withholding, estimate payments, payments with tax returns, and increased tax refunds. Reductions by fiscal year:
• FY 2023 = $154.6 million
• FY 2024 = $160.2 million
• FY 2025 and after = $30.1 million per year
• Other changes made within the contingent income tax system (2018 Iowa Acts, chapter 1161, sections 128 through 130) are projected to reduce FY 2024 corporate income tax liability by $17.9 million and bank franchise tax liability by $2.0 million.
• The reduction in State income tax liability will reduce the amount raised by the local option income surtax for schools by 3.0% of State income tax reduction.

Division II — Early Childhood and Child and Dependent Care Tax Credits

Description and Background

The Bill increases the maximum net income amount used in determining eligibility for the Early Childhood Development (ECD) and Child and Dependent Care (CDC) Tax Credits. The maximum is increased from $45,000 to $90,000. The change is retroactive to tax years beginning on or after January 1, 2021.

The ECD is equal to 25.0% of the first $1,000 in early childhood development (preschool) expenses the taxpayer pays to others for each dependent aged three through five. The federal CDC Tax Credit is equal to up to 35.0% of eligible child care expenses for qualified children and dependents. The Iowa CDC Tax Credit is calculated as a percentage of the federal CDC Tax Credit. The Iowa credit is refundable. The Iowa CDC Tax Credit ranges from 75.0% of the federal credit for taxpayers with net income of less than $10,000, to 30.0% for taxpayers with net income of $40,000 to $44,999. The Iowa CDC Tax Credit is not available to taxpayers with net income of $45,000 or more. The Bill increases the $45,000 income limit for the 30.0% tax credit to $90,000.

Assumptions/Fiscal Impact (Division II) The number of taxpayers benefiting from the increase in the maximum net income amount for the CDC and ECD Tax Credits, as well as the tax credit value, was estimated by the Department of Revenue using the Department’s computer model of Iowa income tax returns. That model utilizes actual State and federal tax return data from TY 2019 to simulate tax returns filed for future tax years. The model gives the Department the ability to change tax parameters and determine the estimated fiscal impact of those changes on tax liability and State General Fund revenue.

Figure 1 To convert tax year impacts to fiscal year impacts, the following timing assumptions are made:

• Fiscal year 2021 ends June 30, 2021. Given the retroactive application to TY 2021, 15.0% of the TY 2021 impact is assumed to fall in FY 2021 and 85.0% in FY 2022.
• Impacts for tax year 2022 and after are assumed to fall 65.0% in the first fiscal year and 35.0% in the second fiscal year.

The changes to the Iowa CDC and ECD Tax Credits contained in the Bill are projected to reduce net General Fund revenue by the following amounts:

• FY 2021 = $0.6 million
• FY 2022 = $16.2 million
• FY 2023 = $4.2 million
• FY 2024 = $4.5 million
• FY 2025 = $4.9 million
• FY 2026 and after = $5.1 million

As refundable tax credits, the changes do not impact the calculation of the local option income surtax for schools. Expected implementation costs for the Department of Revenue are assumed to be minimal. Given the expanded number of taxpayers projected to claim the credits, enforcement costs for the Department will increase.Number of

Taxpayers

Average

Tax Credit

Tax Credit

Total

Number of

Taxpayers

Average

Tax Credit

Tax Credit

Total

Number of

Taxpayers

Average

Tax Credit

Tax Credit

Total

TY 2021 24,530 171$ 4,194,672$ 1,555 68$ 105,746$ 26,085 165$ 4,300,418$ TY 2022 24,082 171 4,117,953 1,488 69 102,674 25,570 165 4,220,627 TY 2023 23,511 171 4,020,366 1,410 71 100,132 24,921 165 4,120,498 TY 2024 25,710 180 4,627,775 1,765 70 123,562 27,475 173 4,751,337 TY 2025 25,955 186 4,827,594 1,682 70 117,760 27,637 179 4,945,354 TY 2026 26,947 190 5,120,000 1,806 72 130,000 28,753 183 5,250,000 Resident Taxpayers Nonresident Taxpayers All Taxpayers CDC and ECD Tax Credit Net Income Maximum Increase

Estimated Taxpayer Benefit by Tax Year

Division III — COVID-19 Grant Tax Exemption

Description and Background

The Bill exempts the proceeds of grants received by a taxpayer from COVID-19 assistance programs administered by the Economic Development Authority (EDA), the Iowa Finance Authority (IFA), and the Department of Agriculture and Land Stewardship (DALS) from the State corporate and individual income tax. The income exclusion provided in the Bill is repealed on January 1, 2024, and does not apply to tax years beginning on or after that date. Assumptions/Fiscal Impact (Division III) The exemption is expected to apply to 14 grant programs administered by the EDA and/or IFA and five grant programs administered by the DALS. The Department of Revenue estimates that $307.8 million in COVID-19 assistance grants has been distributed through these grant programs. Assumptions include:

• A total of $114.9 million was distributed to tax-exempt entities, and a total of $192.9 million was distributed to entities subject to the individual or corporate income tax.
• The average marginal income tax rate will be 5.3% for taxed entities.
• The timing of tax return or amended tax return filing will result in 90.0% of the tax reduction occurring in FY 2021 and 10.0% occurring in FY 2022.

The fiscal impact is estimated to be a reduction of $9.2 million in FY 2021 and $1.0 million in FY 2022.

Division IV — Paycheck Protection Program Taxation

Description

The Bill expands an existing tax preference available for the income and deductions associated with a forgiven federal Paycheck Protection Program (PPP) loan to include taxpayers who received a PPP loan within the taxpayer’s 2019 tax year (TY).

Existing Iowa law provides an income tax exemption and associated expense deduction for forgiven federal PPP loans for tax years beginning on or after January 1, 2020 (TY 2020). This change extends the same benefit to taxpayers whose tax year is not the calendar year and who received PPP income in TY 2019.

Assumption/Fiscal Impact (Division IV) The Department of Revenue estimates that Iowa businesses that do not have a tax year that coincides with a calendar year have a total of $107.8 million in net PPP income that will be subject to Iowa income tax under existing law. The net PPP income amounts, average marginal tax rates, and income tax reductions assumptions are shown in Figure 2. It is anticipated that taxpayers will file returns or amended returns for TY 2019 prior to the end of FY 2021. Figure 2 Division V — Inheritance Tax

Description and Background

Under current law, an inheritance received by a lineal ascendant or descendant of the deceased is exempt from the Iowa inheritance tax no matter the value of the estate or the amount inherited. Tax rates from 5.0% to 15.0% may apply to inheritances that are not otherwise exempt under Iowa Code chapter 450. Inheritance tax returns are generally due nine months after the death of the decedent.

A gross total of $81.5 million in Iowa inheritance tax was deposited to the State General Fund in FY 2020. Over the past six years, refunds of Iowa inheritance tax have averaged $2.4 million. Forecasted Iowa inheritance tax gross receipts for FY 2021 and FY 2022 equal $88.0 million and $91.3 million respectively. Iowa inheritance tax refunds are not forecasted separately. The Bill phases out the inheritance tax rate in five stages by reducing the effective tax rate by 20.0% per year over four years and then eliminating the tax on January 1, 2025 (for deaths occurring on or after that date).

Assumptions/Fiscal Impact (Division V) The Department of Revenue analyzed a sample of 150 Iowa inheritance tax returns filed over the past five years to produce this estimate. The tax involved with the future returns is assumed to reach the State General Fund nine months after the death of the decedent. The DOR estimates that a five-year phase out of the inheritance tax will reduce Iowa General Fund revenue by the following annual amounts:

• FY 2021 = $0.5 million
• FY 2022 = $15.1 million
• FY 2023 = $34.1 million
• FY 2024 = $54.5 million
• FY 2025 = $76.6 million
• FY 2026 = $99.7 million
• FY 2027 = $107.4 millionPPP Net Marginal Tax

Taxpayer Type Income Tax Rate Reduction

Nonprofits 19.7$ 0.0% 0.0$ C Corporations 43.2$ 6.40% 2.8$ S Corps & Partnerships 38.2$ 5.58% 2.1$ Individuals 6.7$ 5.35% 0.4$ 107.8$ 5.3$

Paycheck Protection Program Tax Exemption

Projected General Fund Revenue Reduction

Dollars in Millions

State Administration Issues

Division V of the Bill phases out and eliminates the State inheritance tax. The Bill provides for the removal of inheritance tax references from the Iowa Code. There are certain situations where the tax due under current law is deferred until a later date. While the Department of Revenue states that the authority to collect the deferred inheritance tax likely will still exist without the inheritance tax remaining in the Iowa Code, the Department recommends that the authority to collect deferred inheritance taxes specifically remain as part of the Iowa Code until all deferred taxes have been paid.

Division VI — Real Estate Transfer Tax to Housing Trust Fund

Description and Background

Iowa imposes a Real Estate Transfer Tax at a rate of $0.80 for every $500 of the price paid for the property when real property is sold or otherwise transferred. The first $500 of property is exempt. A list of exempt transfers is provided in Iowa Code section 428A.2. The tax is paid to the county. The county retains 17.25% of the tax and remits the remaining 82.75% to the State. Under current law, the State portion is deposited to three funds:

• 30.0% to the Housing Trust Fund, subject to a maximum fiscal year deposit of $3.0 million.
• 5.0% to the Shelter Assistance Fund.
• The remainder to the State General Fund.

The Bill raises the Housing Trust Fund maximum to $7.0 million per fiscal year, beginning with FY 2022.

Assumptions/Fiscal Impact (Division VI)

• The FY 2020 State portion of the Real Estate Transfer Tax totaled $24.5 million. Of that amount, the Housing Trust Fund received $3.0 million, the Shelter Assistance Fund received $1.2 million, and the State General Fund received $20.3 million.
• State Real Estate Transfer tax receipts are assumed to exceed $23.3 million for FY 2022 and succeeding fiscal years; therefore, it is assumed that the Housing Trust Fund will receive the full $7.0 million allocation each year, reducing General Fund revenue by $4.0 million per year beginning in FY 2022.

Division VII — High Quality Jobs Program Day Care Centers

Description

The Bill amends the eligibility requirements under the High Quality Jobs Program to allow the Economic Development Authority (EDA) to consider whether a proposed project will provide a licensed child care facility for use by the business’s employees.

Assumptions (Division VII) Allowing the EDA to consider the inclusion of a licensed child care facility when determining the eligibility of a business for economic assistance under the High Quality Jobs Program is not projected to have a significant fiscal impact beyond what is assumed for the High Quality Jobs Program in general.

Division VIII — Telehealth Parity

Description and Background

The Bill requires Iowa health carriers to reimburse health care professionals or facilities for health care services for mental health conditions, illnesses, injuries, or diseases provided to a covered person by telehealth on the same basis and at the same rate as the health carrier would apply to the same mental health care services provided to a covered person by the health care professional or facility in person. This requirement would become effective upon enactment, and is retroactive to January 1, 2021.

Between 2018 and 2019, the number of telehealth visits increased by more than 460.0% for persons covered by a State of Iowa health plan, and the number increased in 2020 by more than 4,800.0% across all conditions. In 2020, the number of telehealth visits increased by 6,000.0% for mental health-related conditions. The average amount paid in 2019 for mental health-related services provided via telehealth was approximately $80 per visit. In 2020, this increased to about $138, owing to the following three changes:

• As telehealth became much more common/preferred in 2020 (likely due to the COVID-19 pandemic), the mix of services changed and more costly services that had previously only been done in person were performed via telehealth.
• Carriers (and self-funded plans, like the State of Iowa Plan) agreed to reimburse telehealth services at parity with in-person alternatives.
• Carriers (and self-funded plans, like the State of Iowa Plan) covered member cost sharing related to services received by telehealth.

Assumptions (Division VIII)

• In FY 2021 and beyond, the telehealth utilization trend for individuals with coverage will align more closely with utilization of in-person office visits.
• Based on current utilization trends, the utilization of telehealth services for mental health-related conditions for State of Iowa Plan members will be roughly 1,425 visits each week.
• Telehealth parity will increase the per visit cost as carriers, including the State of Iowa Plan, are required to match the costs associated with in-person services.
• The amount paid by the State of Iowa Plan will be roughly $128 per visit.
• To pay at parity for mental health services delivered through telehealth, instead of at 75.0% of the in-person rate, the additional cost per visit will be $34.50.

Fiscal Impact — Telehealth The estimated cost increase to the State of Iowa Plan for reimbursing health care professionals and facilities for mental health services delivered via telehealth is estimated to be $2.6 million for the first year of implementation. As health care costs increase and utilization patterns change, additional costs are expected in subsequent fiscal years.

Telehealth Claims Paid Through Medicaid

Currently, there is no available data on telehealth claims paid through Medicaid. However, Medicaid currently pays Area Education Agencies (AEAs) and local education agencies (LEAs) for behavioral health services identified in a student’s Individualized Education Plan; subsequently, the AEAs and LEAs return the State portion of the payment to Iowa Medicaid Enterprise for those services. The fiscal impact of telehealth parity cannot be determined at this time for these cases as schools, AEAs, and LEAs maintain the authority to negotiate how services are to be reimbursed.

Division IX — Economic Development Authority Annual Tax Credit Limits

Description and Background

The Bill reduces the maximum amounts of annual tax credits that the Economic Development Authority (EDA) may issue in a year for the High Quality Jobs Program and the Renewable Chemical Production Tax Credit Program. The changes are effective upon enactment and apply to annual tax credit limits for FY 2022 and after.

The annual tax credit limit for the High Quality Jobs Program is established in Iowa Code section 15.119. The tax credit cap has varied over time, with the FY 2016 through FY 2020 cap averaging $107.0 million. Over those five fiscal years, tax incentives awarded through the High Quality Jobs Program have averaged $53.9 million per year. The Bill lowers the annual cap to $70.0 million. The Program has not awarded more than $70.0 million since FY 2016 and based on this history, it is assumed that the $70.0 million cap will not reduce the amount of credits awarded.

The Renewable Chemical Production Tax Credit Program was first available in FY 2017. The annual cap is $10.0 million. Since inception, the Program has awarded a total of $3.3 million in tax credits, with FY 2020 being the highest award year at $1.3 million. The Bill lowers the cap for this Program to no more than $5.0 million in tax credits per year, but it is assumed that the