Relating to state and local finances by modifying individual and alternate income tax rates, withholding credits, franchise tax deductions, methodologies for determining property taxes, and property tax assessment limitations, changing methods of determining compensation of county officials, making contingent transfers from the taxpayer relief fund, and making corrections, and including effective date and applicability provisions

Description

Senate File 2442 has nine divisions and modifies the individual and alternate income tax rates, withholding credits, franchise tax deductions, and property tax procedures; changes methods to determine compensation of county officials; makes contingent transfers from the Taxpayer Relief Fund (TRF); and makes corrections to the Iowa Code. The Bill has retroactive provisions. Division I — Individual and Alternate Income Tax Rates in Tax Year 2025

Description and Background

Division I of the Bill decreases individual income tax rates beginning in tax year (TY) 2025. Division I makes the following changes:

• Eliminates the bracketed individual income tax rates that go into effect in TY 2025 and establishes flat individual income tax rates of 3.8% for tax years beginning on or after January 1, 2025. Currently, a flat individual income tax rate of 3.9% is scheduled to go into effect beginning in TY 2026.
• Eliminates references to calculating the latest cumulative inflation factors in Iowa Code chapter 422 due to removing income tax brackets.
• Decreases the future alternate income tax rate from 4.4% to 4.3% beginning in tax years on or after January 1, 2025.
• Requires the rate of withholding for tax years beginning on or after January 1, 2025, to not be higher than the tax rate in effect for the applicable tax year.

Division I is effective January 1, 2025, and applies to tax years beginning on or after January 1, 2025.

Current individual income tax rates for TY 2024, for TY 2025, and for tax years beginning on or after January 1, 2026, were set in 2022 Iowa Acts, House File 2317 (Income Tax Rate Reduction and Exemptions Act). Figure 1 details current and proposed tax rates for single filers in the Bill by TY, while Figure 2 details current and proposed tax rates for married filers by TY. Figure 1 — Individual Income Tax Rates (Single Filer)TY 2024 TY 2025 TY 2026+ TY 2024 TY 2025+ $0 to $6,210 4.40% 4.40% 4.40% $6,210 to $31,050 4.82% 4.82% $31,050+ 5.70% 5.70% Income — Single

Filer

Current Law

3.90% 3.80% 4.82% SF 2442 Figure 2 — Individual Income Tax Rates (Married Filers) Assumptions/Fiscal Impact (Division I)

• The tax reduction estimate is based on income tax returns filed for TY 2022 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 2022 base tax year.
• Temporary federal law changes under the Tax Cut and Jobs Act of 2017 are assumed to expire after TY 2025. The Iowa individual income tax revisions under 2018 Iowa Acts, Senate File 2417 (Income and Sales Tax Modification Act), and 2022 Iowa Acts, House File, 2317, are incorporated as current law for applicable years.
• Iowa withholding decreases would begin in January 2025, affecting FY 2025 revenue; however, the majority impact of TY 2025 income tax rate decreases would be realized in FY 2026.
• Tax year results are converted to fiscal year estimates using historical relationships between income tax withholding, estimate payments, tax refunds, and payments with filed tax returns.
• 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 income surtax owed by any taxpayer subject to the surtax. For this projection, the surtax is assumed to equal 2.5% of State individual income tax liability.

The individual income tax rate changes in SF 2442 are projected to decrease net individual income tax liability and State General Fund revenue by the following amounts:

• FY 2025 = $328.2 million
• FY 2026 = $605.3 million
• FY 2027 = $97.0 million
• FY 2028 = $96.8 million
• FY 2029 = $99.5 million
• FY 2030 = $102.4 million

The decrease in tax liability is also projected to decrease the statewide local option income surtax for schools by the following amounts:

• FY 2025 = $8.1 million
• FY 2026 = $15.0 million
• FY 2027 = $2.4 million
• FY 2028 = $2.4 million
• FY 2029 = $2.5 million
• FY 2030 = $2.5 millionTY 2024 TY 2025 TY 2026+ TY 2024 TY 2025+ $0 to $12,420 4.40% 4.40% 4.40% $12,420 to $62,100 4.82% 4.82% $62,100+ 5.70% 5.70%

Income —

Married Filers

Current Law

3.90% 3.80% 4.82% SF 2442 Division II — Targeted Jobs Withholding Credit

Description and Background

Division II of the Bill makes the following changes to the Targeted Jobs Withholding Tax Credit:

• Increases the investment required for a business to qualify for the credit from $500,000 to $1.0 million.
• Extends the ability of the Iowa Economic Development Authority (IEDA) to enter into a targeted jobs withholding agreement by three years, from June 30, 2024, to June 30, 2027.
• Changes the entity responsible for annual compliance reporting concerning a targeted jobs withholding agreement from the pilot project city to the employer.

The Targeted Jobs Withholding Tax Credit was created in 2006 as an economic incentive tool available in a small number of cities for a limited time. The availability of the credit has been extended several times. The incentive is funded through individual income tax withholding. Instead of remitting income tax withholding from certain employees to the State General Fund, the employer forwards the withholding tax to the city to finance a project related to the employer pursuant to an agreement between the employer and the pilot project city. Under current law, the authority for employers and pilot project cities to enter into new agreements expires June 30, 2024.

Assumptions/Fiscal Impact (Division II)

• Based on historical award data, it is estimated that $4.0 million will be awarded each year for FY 2025 through FY 2027.
• Based on historical claim data, the credit redemption pattern, in the form of retained withholding tax from employee paychecks, will be:
• First fiscal year = 3.0%
• Second fiscal year = 5.0%
• Third through eleventh fiscal year = 8.0% per year
• Awarded credits that are never redeemed = 20.0%

Extending the Targeted Jobs Withholding Pilot Project by three additional years is projected to reduce General Fund revenue by the following amounts:

• FY 2025 = $120,000
• FY 2026 = $320,000
• FY 2027 = $640,000
• FY 2028 = $840,000
• FY 2029 = $960,000
• FY 2030 = $960,000

Division III — Franchise Tax — Investment Subsidiaries

Description and Background

Division III of the Bill:

• Allows the deduction of expenses allocable to investment in an investment subsidiary for purposes of the franchise tax.
• Allows a financial institution with an investment subsidiary to elect to include the income and expenses of the investment subsidiary on a franchise tax return.
• Requires the inclusion of income and expenses of the investment subsidiary on all subsequent franchise tax returns as long as the investment subsidiary remains a subsidiary of the financial institution.
• Specifies if the financial institution requests the filing of separate returns and the director of the Iowa Department of Revenue (IDR) determines separate returns will more clearly disclose the taxable income, the financial institution may file a separate return from the investment subsidiary.

Division III of the Bill is effective for tax years beginning on or after January 1, 2025. The deduction of expenses allocable to investment in a subsidiary was previously eliminated in 1995 Iowa Acts, chapter 193 (Franchise Tax on Financial Institutions Act), which required financial institutions to pay the franchise tax when depositing certain kinds of investments in subsidiary corporations.

Assumptions/Fiscal Impact (Division III)

• The Bill is not expected to have a compulsory impact on banks as use of investment subsidiaries is optional.
• Any fiscal estimate is dependent on the extent to which banks choose to open investment subsidiaries to elect the deduction associated with investment in subsidiaries to reduce franchise tax liability.
• The IDR cannot estimate the fiscal impact of Division III due to a lack of information but believes Division III may result in either less or more franchise tax revenue to the General Fund, dependent on taxpayer actions that cannot be predicted.
• The estimated fiscal impact from 1995 Iowa Acts, chapter 193, was a gain in tax revenue of approximately $8.0 million annually to the General Fund.
• TY 2025 franchise tax revenue is expected to affect FY 2026 revenue. The fiscal impact of Division III of the Bill cannot be determined due to a lack of information. Division IV — Property Tax Procedures

Description and Background

Division IV makes the following modifications to property tax procedures and statements found in Iowa Code section 24.2A:

• Changes the deadline for political subdivisions to file reports with the Department of Management (DOM) from March 15 to 4:00 p.m. on March 5.
• The report is required to include all necessary information for the DOM to compile and calculate amounts required to be included in the statements sent out to property tax owners and taxpayers in that subdivision. If a city or county fails to meet the deadline, that city’s or county’s tax levy is limited to the previous year’s budget amount.
• Changes the deadline for county auditors to send an individual statement containing information relating to property taxes from March 20 to March 15.
• Increases the assessed value of the example property on the property tax statement from $100,000 to $300,000 for residential and commercial properties. This change applies to all fiscal years beginning on or after July 1, 2025. The Bill also changes the amount used for residential and commercial property in the budget year to 110.0% of the value of the property used as the current fiscal year example.
• On or after July 1, 2024, statements must include a percent change in property taxes owed from the current fiscal year example to the budgeted year example.
• Requires that all statements include a link to the DOM’s Internet site. This requirement is retroactive to January 1, 2024.

Division IV amends requirements related to public hearings for a political subdivision’s proposed property tax amount found in Iowa Code section 24.2A.

Division IV repeals the 1848 Iowa Acts, First Extraordinary Session, chapter 52, which required Lee County to maintain a district court at Fort Madison and the city of Keokuk. The Act also required the clerk of the district court and the sheriff of Lee County to keep offices at both Fort Madison and the city of Keokuk.

Division IV allows a city to levy at a rate not to exceed $8.10 per $1,000 of assessed valuation for its general fund levy if the city's actual levy rate for the current fiscal year is $0 per $1,000 of value and the total assessed value used to calculate taxes for that budget year exceeds 102.75%. This provision is effective upon enactment.

Counties may collect taxes for a fiscal year for which no budget has been certified for the county, but the Bill prohibits a county from distributing any funds collected until the county certifies its budget and transmits the certified budget to the county auditor. Division IV allows the DOM to make exemptions to this requirement on a case-by-case basis. A municipality with a population equal to or greater than 15,000 using tax increment financing for public improvements related to housing is limited to tax collection for a maximum of 10 fiscal years. The Bill allows a municipality of any size to extend its urban renewal area tax collections for three additional years if the project for which revenue is being divided was established prior to January 1, 2018, to adequately fund the project. All governing bodies of the taxing district affected must approve the extension, and this provision of this Bill takes effect upon enactment. Division IV requires the county recorder, county treasurer, county assessor, city assessor, or other government body to maintain confidentially the names, addresses, and dates of birth of persons receiving the 65+ homestead tax exemption.

Taxing district assessors are required to report to the county auditor, in a manner that is compatible with the county auditor's software, the valuations and revaluations in their taxing district as instructed by the DOM.

2023 Iowa Acts, chapter 71, requires the Director of the DOM to annually prepare and file a report by December 1 with the General Assembly. Division IV changes the county and city bond issuance reporting deadline for the DOM from December 1 to no later than January 1. Assumptions/Fiscal Impacts (Division IV)

DOM

The fiscal impact to the DOM is estimated to be approximately $20,000 for technology changes and updates to the existing software system. The expenses would be paid from Technology Reinvestment Fund appropriations to the DOM for local government systems. Lee County District Court and Sheriff Offices The closure of the City of Keokuk clerk of the district court and the sheriff of Lee County offices may generate local savings. The LSA is unable to estimate the local impact.

City Levy Rates

2023 Iowa Acts, House File 718, restricted any city that received zero property taxes and had a $0.0 tax rate from levying a new rate increase unless the city’s assessed value grew less than 3.0% in terms of taxable value. Cities that grew by more than 3.0% would not be allowed to tax real property in FY 2025.

In FY 2024, seven cities are prevented from raising their rates in FY 2025. Of those cities, four incurred taxable growth in excess of 3.0% and would be eligible to increase rates and collect property taxes in FY 2025 under this Division. This Bill would generate an additional $145,000 in statewide property tax revenue. Cities affected include:

• Bagley — Increased FY 2025 taxable property growth by 5.8%, which generates $34,000 in additional revenues.
• Pleasanton — Increased FY 2025 taxable property growth by 10.6%, which generates $5,000 in additional revenues.
• Sageville — Increased FY 2025 taxable property growth by 16.8%, which generates $83,000 in additional revenues.
• Zwingle — Increased FY 2025 taxable property growth by 11.1%, which generates $23,000 in additional revenues.

Tax Increment Financing (TIF) The FY 2023 Annual Urban Renewal Report identified a total of 84 low- and moderate-income housing-related projects. Of those projects, 53 were created prior to January 1, 2018, with a total balance of $11.3 million. It is unknown how many of these TIFs may utilize this program, and the impact on local property taxes cannot be estimated.

Division V — Compensation of Elected County Officials

Description and Background

Division V of the Bill does the following:

• Requires a majority vote from a board of county supervisors to change the compensation schedule of elected county officials if a compensation board does not exist.
• Allows a board of county supervisors to dissolve or create a county compensation board upon a majority vote of the members of the board. Requires the board of supervisors to annually prepare and review a compensation schedule if a compensation board does not exist.
• Requires the salary of a county sheriff to be comparable to salaries paid to professional law enforcement administrators and command officers of the State Patrol, the Division of Criminal Investigation of the Department of Public Safety (DPS), and city police chiefs in cities of a similar population to the population of the county.
• Requires a county compensation board to provide documentation to the board of supervisors demonstrating how the compensation board determined its recommended compensation schedule.
• Allows a board of supervisors to set compensation of a position at less than compensation provided in the current compensation schedule if the position is reduced to part-time.

Fiscal Impact

Division V is not expected to have a fiscal impact.

Division VI — County and City Tax Levy Rate Adjustments

Description and Background

Division VI makes changes to the limits on county and city property tax rates established in 2023 Iowa Acts, House File 718. House File 718 consolidated property tax rate limits to allow rate adjustment by the growth of that local taxing districts property assessments into a new combined general fund levy (CGFL rate).

Current Law Under HF 718 House File 718 made the following county changes, which are impacted by Division VI:

• Consolidated several county functions that were previously financed through a combination of general county services, rural county services, and additions to general/rural county services levies. The consolidation first occurs for FY 2025.
• Created additional limits on the maximum allowed general and rural county services tax rates. The new limits apply to FY 2025 through FY 2028 and will be specific to each county.
• Established maximum general county and rural county services rates for FY 2029 and after that will apply to all counties. The maximum rates for FY 2029 and after are $3.50 for general county services and $3.95 for rural county services.
• The new county-specific general services tax rate limits for FY 2025 are based on rates in place for FY 2024, including the consolidation within the general or rural services levies of any levies utilized by the county during FY 2024. For four fiscal years (FY 2025 through FY 2028), maximum county-specific tax rates are based on growth in county-taxed value and county tax rates. For FY 2025 through FY 2028, the application of new county general service levy limits will fall into one of three categories depending on the situation in each county each year:
• Category 1 — Counties with general services tax base growth that exceeds 3.00% but is less than 6.00%: A county in this category will have its maximum property tax dollars reduced by 2.00 percentage points for the budget year through a reduction in the maximum tax rate.
• Category 2 — Counties with general services tax base growth that equals or exceeds 6.00%: A county in this category will have its maximum property tax dollars reduced by 3.00 percentage points for the budget year through a reduction in the maximum tax rate.
• Category 3 — Counties with general services budget year tax base growth of 3.00% or less: Counties in this category will be able to utilize all growth in the property tax base, and if the county’s current-year rate is below $3.50, the county may raise the budget year general services rate to $3.50.
• Rural county services tax rates are limited in the same manner as discussed above, but the limit is based on the rate of growth in a county’s rural tax base and the current year’s rural county services tax rate, with references to the $3.50 tax rate changed to $3.95. House File 718 made the following city changes, which are impacted by Division VI:
• Consolidated authority for the city general fund ($8.10) levy, 16 of 21 additions to the city general fund levy (Iowa Code section 384.12), the emergency levy (Iowa Code section 384.8), and any levy increases that are the result of the suspension of statutory levy limits approved by the State Appeals Board under Iowa Code section 24.48. Separate authority for the emergency levy was stricken, and the 16 levy purposes are removed from the list of additions to the city basic levy in Iowa Code section 384.12. In addition, the State Appeals Board is allowed to approve the suspension of a city statutory levy limit only in the event of a natural disaster, unusual problems related to major new functions required by State law, or an unusual need for a new program that will provide substantial benefits to county residents.
• Created additional limits on the maximum allowed city general fund tax rate.
• Created new city-specific general fund tax rate limits for FY 2025 that are based on FY 2024 rates, and for FY 2025 through FY 2028, city-specific tax rates are based on growth in city taxed value and the previous year’s city tax rate. For FY 2025 through FY 2028, the application of new city general fund rate limits will fall into one of three categories depending on the situation in each city:
• Category 1 — Cities with tax base growth that exceeds 3.00% but is less than 6.00%: A city in this category will have its maximum property tax dollars reduced by 2.00 percentage points for the budget year through a reduction in the maximum tax rate.