Relating to state and local revenue and finances by modifying sales and use taxes, the charitable conservation contribution tax credit available against individual and corporate income taxes, the water service tax, property taxes, transit funding, and local option taxes, crediting moneys to the natural resources and outdoor recreation trust fund, modifying allocations of road use tax fund moneys, making appropriations, and including effective date, retroactive applicability, and applicability provisions

Description

Senate File 550 is composed of 12 divisions related to sales/use tax and property tax, including:

• Division I relates to the State sales and use taxes.
• Division II relates to the water service tax.
• Division III relates to the local option sales and services tax.
• Division IV replaces the current Homestead Property Tax Credit, over a period of years, with a property tax exemption. The Bill eliminates the State General Fund appropriation that currently finances the credit.
• Division V makes changes to the Elderly Property Tax Credit.
• Division VI increases the Military Property Tax Exemption and reduces then eliminates the State General Fund reimbursement to local governments that finances a portion of the exemption.
• Division VII reduces the percentage of assessed value at which pipeline property is taxed (rollback) from the current 100.0000% to 90.0000% over two years. The Division also reduces the percentage of assessed value at which commercial, industrial, and railroad property is taxed from the current 90.0000% to 80.0000% over two years.
• Division VIII amends the distribution of moneys credited to the Natural Resources and Outdoor Recreation Fund to the various accounts within the Fund.
• Division IX repeals the Charitable Conservation Contribution Tax Credit.
• Division X restricts the application of new commercial and residential property tax abatements within the Urban Revitalization program.
• Division XI relates to the diversion of school finance property taxes through Tax Increment Financing (TIF) when the source of the TIF revenue is wind energy conversion property.
• Division XII relates to funding for transit programs for the city of Des Moines. Divisions I and III — State Sales Tax, Use Tax, and Local Option Sales and Services Tax Divisions I and III Background and Description

Iowa’s current sales tax rate and use tax rate, with minor exceptions, is 6.0% of the purchase of products and services subject to State General Fund taxation. One percentage point of the rate is devoted to local school infrastructure through the Secure an Advanced Vision for Education (SAVE) Fund created in Iowa Code chapter 423F (Statewide School Infrastructure Funding). Local governments also have the option to add 1.0% to the purchase price on sales that are subject to the State sales tax. As specified in Iowa Code section 423B.5, the local option sales and service tax does not apply to sales subject to the State use tax. Figure 1 provides a six-fiscal-year history of State and local sales and use tax collections with the following four columns:

• State Sales/Use Tax (Gross Deposits) — The amounts listed include moneys that are later transferred to the SAVE Fund but do not include moneys that are deposited into the Local Option Sales Tax Fund.
• SAVE Fund — One percentage point of the State 6.0% sales/use tax rate is transferred to the SAVE Fund to be distributed to local school districts for infrastructure funding.
• Local Option Sales Tax — Amounts deposited into the Local Option Sales Tax Fund for distribution to cities and counties where the local option sales and services tax is in place. Most, but not all, local areas in Iowa currently have the local option sales and services tax in place.
• Local Option as a Statewide Sales Tax Rate — This column is the result of dividing the Local Option Sales Tax column by the State Sales/Use Tax column. This column shows that as of FY 2022, the local option tax is very close to a statewide 1.00% sales tax, and this leads to a conclusion that nearly all the revenue deposited to the State General Fund as sales/use tax is regarded as State sales tax and only a relatively small amount is regarded as State use tax where the local option sales and services tax would not apply. Figure 1

The Bill increases the current 6.0% State General Fund sales tax and use tax rates to 7.0% from January 1, 2025, through December 31, 2050. On January 1, 2051, the rates return to 6.0%. The Bill also eliminates the 1.0% local option sales and services tax. Effective tax rates by program funded under current law and as proposed in the Bill are listed in Figure 2 (sales tax) and Figure 3 (use tax). Abbreviations and terms used in the two figures include:

• CY — Calendar year.
• SAVE — Secure an Advanced Vision for Education.
• NRORTF — Natural Resources and Outdoor Recreation Trust Fund.
• Local — Distributions to all cities and counties to replace the repealed local option sales and services tax.

Figure 2State Local Local Option

Sales/Use SAVE Option as a Statewide

Tax Fund Sales Tax Sales Tax Rate FY 2017 2,831.5$ 460.4$ 333.2$ 0.71% FY 2018 2,949.6 480.8 320.2 0.65% FY 2019 3,056.1 503.1 350.9 0.69% FY 2020 3,182.3 507.6 443.0 0.84% FY 2021 3,574.1 560.4 500.7 0.84% FY 2022 3,798.7 571.3 606.3 0.96%

Sales and Use Taxes

Dollars in MillionsState Sales Tax Sales Tax Sales Tax Sales Tax Sales Rate to Rate to Rate to Rate to Time Period Tax Rate SAVE NRORTF Local General Fund Current Law 6.000% 1.000% 0.000% 0.000% 5.000% CY 25 - CY 27 7.000% 1.000% 0.375% 1.400% 4.225% CY 28 7.000% 1.000% 0.375% 1.350% 4.275% CY 29 7.000% 1.000% 0.375% 1.300% 4.325% CY 30 - CY 43 7.000% 1.000% 0.375% 1.250% 4.375% CY 44 - CY 50 7.000% 1.000% 0.375% 1.250% 4.375% CY 51 and After 6.000% 0.000% 0.375% 1.250% 4.375%

State Sales Tax Effective Rates

Distribution by Program

Figure 3 Divisions I and III Assumptions and Fiscal Impact Revenue projections for the various programs funded under current law and under the Bill are based on the following assumptions:

• The impact of the changes in the Bill begins in mid-FY 2025. With the changes effective January 1, 2025, the changes impact the second half of FY 2025.
• The level of retail sales subject to the sales/use tax in FY 2025 is estimated by dividing the amount of sales/use tax revenue projected by the Revenue Estimating Conference for cash fiscal year 2024 ($3,924.7 million) by the current State tax rate (6.0%). This FY 2024 result is then increased by 3.5% and used as the FY 2025 estimate of retail sales subject to either the State sales tax or the State use tax during FY 2025.
• Retail sales subject to the State sales/use tax for fiscal years after FY 2025 are assumed to increase 3.5% annually.
• For all years, the level of retail sales subject to sales/use tax is assumed to be the same under current law and under the Bill.
• Based on the information provided in Figure 1, it is assumed that a significant majority of sales/use tax revenue deposited to the State General Fund under current law is generated through the State sales tax. For FY 2023 and future fiscal years, 95.0% of all combined sales and use tax revenue is assumed to be generated through the State sales tax.
• The annual amount of sales/use tax refunded each year is a small percentage of gross sales/use tax. For simplification, sales and use tax refunds are ignored in the calculations. Figure 4 provides the estimated revenue distributed to each program financed through State and local sales/use tax under current law (Part I), under the Bill (Part II), and the fiscal impact of Divisions I and III of the Bill (Part III). Notes for interpreting Figure 4 include the following:
• SAVE Fund — Secure an Advanced Vision for Education Fund (school infrastructure funding).
• Sales Tax to Locals and Local Supplement Fund — Funding under the Bill to replace and enhance funding that comes from the local option sales and services tax.
• Natural Resources Fund — The NRORT Fund was created in Iowa Code section 461.31. Changes to the distribution of moneys deposited to that Fund are contained in Division VIII of the Bill.State Use Tax Use Tax Use Tax Use Tax

Use Rate to Rate to Rate to Rate to Time Period Tax Rates SAVE NRORTF Local General Fund Current Law 6.000% 1.000% 0.000% 0.000% 5.000% CY 25 - CY 27 7.000% 1.000% 0.000% 1.000% 5.000% CY 28 7.000% 1.000% 0.000% 1.000% 5.000% CY 29 7.000% 1.000% 0.000% 1.000% 5.000% CY 30 - CY 43 7.000% 1.000% 0.000% 1.000% 5.000% CY 44 - CY 50 7.000% 1.000% 0.000% 0.000% 6.000% CY 51 and After 6.000% 1.000% 0.000% 0.000% 5.000%

State Use Tax Effective Rates

Distribution by Program

Figure 4 Division II — Water Service Tax

Division II Background and Description

The water service tax was created in 2018 Iowa Acts, chapter 1001, as a 6.0% tax on the sale or furnishing of water by a water utility to consumers or users. The tax is defined as an excise tax and not a sales or a use tax. Currently, 50.0% of the revenue derived from the tax is deposited to the Water Quality Financial Assistance Fund (WQFAF), and the remainder is deposited to the State General Fund. Iowa Code section 423G.7 provides for the automatic repeal of the water service tax on July 1, 2029, or when the State sales tax is increased, whichever occurs first.

The Division requires that all water service tax be deposited in the General Fund and eliminates the automatic repeal of the tax.

Division II Assumptions and Fiscal Impact

A total of $34.0 million in water service tax revenue was received by the State in FY 2022, with $17.0 million deposited to the WQFAF and $17.0 million deposited to the State General Fund. The FY 2022 total is assumed to increase by 3.5% per year through FY 2029. Increasing the State sales tax rate to 7.0% (Division I of the Bill), striking the automatic repeal of the water service tax and changing the destination of the tax will decrease WQFAF revenue and increase State General Fund revenue by the following estimated amounts:

• FY 2025 = $9.4 million
• FY 2026 = $19.5 million
• FY 2027 = $20.2 million
• FY 2028 = $21.6 million
• FY 2029 and after = $44.8 millionProgram FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 State General Fund 2,970.6$ 3,268.9$ 3,385.1$ 3,503.5$ 3,626.2$ 3,753.1$ 3,884.4$ SAVE Fund 749.7 655.8 677.0 700.7 725.2 750.6 776.9

Local Option Tax 589.0 621.4 643.2 665.7 689.0 713.1 738.0 Total Sales/Use 4,309.3$ 4,546.1$ 4,705.3$ 4,869.9$ 5,040.4$ 5,216.8$ 5,399.3$ Program FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 State General Fund 2,970.6$ 3,268.9$ 3,135.9$ 2,987.6$ 3,092.2$ 3,218.3$ 3,367.8$ SAVE Fund 749.7 655.8 677.0 700.7 725.2 750.6 776.9 Sales Tax To Locals 589.0 621.4 771.8 931.9 964.6 980.5 977.9 Local Supplement Fund 0.0 0.0 16.9 35.0 36.3 37.5 38.8 Natural Resources Fund 0.0 0.0 120.6 249.6 258.4 267.4 276.8 Total Sales/Use 4,309.3$ 4,546.1$ 4,722.2$ 4,904.8$ 5,076.7$ 5,254.3$ 5,438.2$ Program FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 State General Fund 0.0$ 0.0$ -249.2$ -515.9$ -534.0$ -534.8$ -516.6$ SAVE Fund 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Sales Tax To Locals 0.0 0.0 128.6 266.2 275.6 267.4 239.9 Local Supplement Fund 0.0 0.0 16.9 35.0 36.3 37.5 38.8 Natural Resources Fund 0.0 0.0 120.6 249.6 258.4 267.4 276.8 Total Sales/Use 0.0$ 0.0$ 16.9$ 34.9$ 36.3$ 37.5$ 38.9$ Part I — State and Local Sales/Use Tax Projection — Current Law Part II — State and Local Sales/Use Tax Projection — Proposed Law Part III — State and Local Sales/Use Tax Projection — Difference

In Millions

In Millions

In Millions

Division IV — Homestead Property Tax Credit and Exemption

Division IV Background and Description

Iowa Code section 425.1 provides a property tax credit to benefit the owner of a qualified homestead property. Through the credit, the State General Fund pays the annual property tax due on up to $4,850 of a homestead’s value. At the FY 2023 statewide average residential property tax rate of $33.65 per $1,000 of taxed value, the annual benefit to the homestead owner averages $163. The statewide total number of qualified homestead credits for FY 2023 is 750,259 (includes disabled veteran credits described below). The homestead credits are paid to the local property tax system through transfers from the Homestead Tax Credit Fund. That fund receives an annual standing appropriation from the State General Fund. The portion of the FY 2023 General Fund appropriation that covers the regular homestead credit is estimated to be $121.0 million.

Iowa Code section 425.15 provides a tax credit that covers the full property taxes owed on the homestead of a qualified disabled veteran. The same State General Fund appropriation that finances the regular homestead credit also finances this disabled veteran credit. The portion of the FY 2023 General Fund appropriation that covers the disabled veteran tax credit is estimated to be $25.7 million.

The Bill phases out the current regular homestead credit and phases in a replacement homestead exemption. After phase-in, the homestead exemption for property owners aged 65 and over will equal $16,500 and will equal $10,000 for all other qualified owners. The existing credit is eliminated and the transition to the new exemption is complete for taxes due in the fall of 2028 and the spring of 2029 (FY 2029).

The Bill also transitions the disabled veteran homestead credit to a homestead exemption. This transition is not phased in, but instead occurs in full for FY 2026.

The changes to the existing regular and disabled veteran homestead property tax credits will reduce and then eliminate the current State General Fund appropriation that finances the existing credits. The new homestead exemption will reduce local government property tax revenue. A portion of the reduction that is created by switching to an exemption will be backfilled through the State General Fund appropriation for school aid. The Division also strikes a portion of Iowa Code section 25B.7, switching full funding of enacted property tax credits and exemptions, and also exempts the changes made in the Bill to the homestead credit from the application of Iowa Code section 25B.7.

The changes are effective for property taxes due in the fall of 2025 and the spring of 2026 (FY 2026).

Division IV Assumptions and Fiscal Impact

The projected tax and revenue implications of the change from a homestead credit to an enhanced homestead exemption are based on the following assumptions:

• There are 750,259 homestead credits claimed for FY 2023. Disabled veteran claims are assumed to equal 8,700, and claims for the regular homestead exemption are assumed to equal 741,559. Claim levels are assumed to remain static.
• Based on the FY 2023 average statewide property tax rate of $33.65 for residential property, the regular homestead credit is assumed to equal $163 under current law, and the average disabled veteran claim is assumed to equal $2,961. The average disabled veteran homestead is assumed to have a value subject to property tax of $88,000. To simplify calculations, the same rate and value assumptions are used for future years.
• The disabled veteran homestead credit will switch to a disabled veteran homestead exemption for FY 2026. With the exception of the school finance $5.40 basic levy, this will shift the cost of the program to local governments and away from the State General Fund for FY 2026 and after.
• The regular homestead credit will shift to a homestead exemption over the course of FY 2026 through FY 2029. With the exception of the school finance $5.40 basic levy, this will shift the cost of the program to local governments and away from the State General Fund. The shift will occur in stages from FY 2026 to FY 2029.
• The percentage of the 741,559 regular homesteads that are owned by at least one owner aged 65 or older is not known. For this projection, it is assumed that 35.0% have an owner aged 65 or older, and that percentage is assumed for all years.

The changes to the existing homestead property tax credit will decrease property taxes owed by homestead owners, produce a net decrease in the annual General Fund appropriations to finance homestead property tax benefits, and decrease local government property tax revenue. The projected changes are displayed in Figure 5.

Figure 5 Division V — Elderly Property Tax Credit

Division V Background and Description

Iowa Code section 425.16 provides a tax credit, or alternatively a rent reimbursement, for low-income persons who are disabled and/or are 65 years of age or older. Calculation of the credit for an individual homeowner or renter is provided in Iowa Code section 425.23. A portion of this property tax credit program further limits property taxes for qualified low-income homeowners aged 70 or older.

The Bill modifies the low-income portion of the property tax credit for those aged 70 or older to account for the application of any homestead tax credit within the tax credit calculation.

Division V Assumptions and Fiscal Impact

The changes related to the calculation of the potential property tax credit for low-income taxpayers aged 70 or older are projected to have a modest negative impact on local government property tax revenue.Change in Local Change in Property Change in State Change in State Government Tax Owed by General Fund General Fund Property Tax Homestead Owners School Aid Approp. Homestead Approp. Revenue FY 2026 -46.3$ 16.4$ -56.0$ -85.9$ FY 2027 -92.8 28.7 -86.1 -150.2 FY 2028 -139.2 41.0 -116.3 -214.5 FY 2029 -185.3 53.3 -146.8 -278.8 FY 2030 -185.3 53.3 -146.8 -278.8 Projected Change in Property Tax Owed, State Appropriations, and Local Government Property Tax Revenue

In Millions

Division VI — Military Service Property Tax Exemption and Credit

Division VI Background and Description

Iowa Code section 426A.11 creates a Military Service Property Tax Exemption to benefit qualified former military personnel. For most beneficiaries, the exemption applies to $1,852 of taxed value. A State standing unlimited appropriation is created in Iowa Code section 426A.2 that credits the local property tax system for $6.92 per $1,000 of property value exempted. The State General Fund school aid appropriation also reimburses the local school finance system for an additional $5.40 per $1,000 of exempted value.

The Bill increases the exempt value in two stages. For FY 2026, the exempt value is increased to $2,055. For FY 2027 and after, the exempt value is $4,000. The Bill also reduces and then eliminates State funding for a portion of the exemption. For FY 2026, the $6.92 per $1,000 of otherwise taxable value is limited to $945 of value. Effective for FY 2027 and after, the Bill eliminates the annual appropriation to specifically fund a portion of the exemption. The Bill also strikes a portion of Iowa Code section 25B.7, which requires full funding of enacted property tax credits and exemptions, and also exempts the changes made in the Bill to the Military Service Property Tax Exemption and Credit from the application of Iowa Code section 25B.7.

The changes in this Division are effective for FY 2026 and after.

Division VI Assumptions and Fiscal Impact

The projected tax and revenue implications of the Bill’s increase in the Military Service Property Tax Exemption and the elimination of the State appropriation to fund a portion of that credit is based on the following assumptions:

• Based on Department of Management property tax value and rate files, for FY 2023, there are an estimated 121,624 beneficiaries of the Military Service Property Tax Exemption. Additionally, the annual number of beneficiaries has decreased at an average rate of 5,258 per year for the past four years. That rate of decrease is assumed to continue from the FY 2023 number of beneficiaries through FY 2028.
• The FY 2023 statewide average property tax rate for residential property is $33.65. This rate is assumed for all years.
• Increasing the exempt amount while decreasing the State reimbursement for program claims will decrease property taxes owed by program claimants, decrease and then eliminate the State Military Service Property Tax Exemption Credit appropriation, increase the State appropriation for school aid, and decrease local government property tax revenue. The fiscal impact on each of these items is displayed in Figure 6.

Figure 6 Division VII — Taxable Value Decrease for Pipeline and Other Business Property

Division VII Background and Description

Real property is taxed on a percentage of its value as determined through an assessment process. The percentage of assessed value that is subject to taxation is referred to as a rollback. Certain property classes are assigned a static rollback, and other classes have a rollback calculated annually by formula. For assessment year 2022 (taxes due during FY 2024),