Related to state taxation and finance and other related matters, by creating, modifying, and eliminating tax credits and tax incentive programs, providing for penalties, and including effective date and retroactive applicability provisions

Description

Senate File 657 has 21 divisions and modifies tax credit caps for the Iowa Economic Development Authority (IEDA); creates the Business Incentives for Growth (BIG) Program, the Seed Investor Tax Credit Program, the Iowa Film Production Incentive Program, the Research and Development Tax Credit Program, and the Sustainable Aviation Fuel (SAF) Production Tax Credit Program; eliminates the High Quality Jobs (HQJ) Program, the Investments in Qualifying Business (Angel Investor) Tax Credit, Employer Child Care Tax Credits, and Research Activities Tax Credits; decreases the annual cap to the Endow Iowa Tax Credit Program; modifies biofuel reporting; makes conforming changes; and includes criminal penalties. Divisions of the Bill are effective upon enactment and have sunset dates.

Division I — Economic Development Programs — Tax Credit Limits

Description

Division I of the Bill:

• Decreases the existing aggregate tax credit limit of $170.0 million for economic development programs to $110.0 million for business development tax credit programs beginning in FY 2026.
• Removes the Redevelopment Tax Credit Program and Workforce Housing Tax Incentives Program from the aggregate tax credit limit for business development tax credit programs.
• Specifies a combined $10.0 million annual tax credit limit for the Innovation Fund Tax Credit and the Seed Investor Tax Credit created in Division VI of the Bill. Decreases the allocation in FY 2026 by any tax credit from the Angel Investor Tax Credit Program authorized before July 1, 2026.
• Specifies a combined $10.0 million annual tax credit limit for the Renewable Chemical Production Tax Credit and the SAF Production Tax Credit created in Division XV of the Bill.
• Specifies a $40.0 million annual tax credit limit for the Research and Development Tax Credit created in Division XIV of the Bill.
• Specifies a $50.0 million annual tax credit limit for the BIG Program created in Division III of the Bill for FY 2027 and for each fiscal year thereafter. For FY 2026, the aggregate tax credit limit between the BIG Program and the HQJ Program eliminated in Division IV of the Bill is $50.0 million.
• Requires the IEDA to submit a report to the Iowa Department of Revenue (IDR) on or before August 15 of each year on the tax credits awarded under each economic development program specified in Division I of the Bill.

Background

Figure 1 details the current tax credit award maximums authorized under the $170.0 million economic development aggregate cap and the tax credit award maximums authorized under the $110.0 million business development aggregate cap in the Bill.

Figure 1 — IEDA Tax Credit Award Maximums (in Millions) The IEDA Board is authorized to award economic development tax credits. Figure 2 details awards authorized for programs under the current aggregate cap of $170.0 million, from FY 2021 through FY 2024, as detailed in IEDA Board packets.

Figure 2 — IEDA Tax Credit Awards (FY 2021-FY 2024) (in Millions)

Assumptions/Fiscal Impact

The changes in tax credit limits in Division I of the Bill are expected to have fiscal impacts that are analyzed and addressed in other sections of this fiscal analysis. Fiscal impacts are summarized at the end of the Fiscal Note.

Division II — Economic Development Programs — Tax Credit Limits — Conforming

Changes

Description

Division II of the Bill makes conforming changes to the Redevelopment Tax Credit, Renewable Chemical Production Tax Credit, and Workforce Housing Tax Incentives Program. The Division also:

• Specifies the following annual aggregate tax credit limits for the Workforce Housing Tax Incentives Program:
• FY 2026 = $39.5 million
• FY 2027 = $36.5 million
• FY 2028 and beyond = $35.0 million
• Specifies an annual maximum cap of $15.0 million per fiscal year for the Redevelopment Tax Credit and allows the IEDA to award any irrevocably declined tax credit awards the following fiscal year.Program FY 2021 FY 2022 FY 2023 FY 2024

HQJ Program (includes Research Activities Supplemental) 32.5$ 61.1$ 36.5$ 20.8$ Workforce Housing Tax Incentives Program 24.0 42.5 35.0 38.3 Redevelopment Tax Credit 10.0 15.0 18.5 21.0 Innovation/Angel Investor Tax Credits 5.9 6.3 3.8 3.4 Renewable Chemical Production Tax Credit 1.0 1.2 1.0 0.0 Total 73.4$ 126.1$ 94.8$ 83.5$Program Maximum Program Maximum HQJ Program $68.0 BIG Program $50.0 Workforce Housing Tax Incentives Program 35.0 Innovation Fund and Seed Investor Tax Credits 10.0 Redevelopment Tax Credit 15.0 Innovation Fund Tax Credit 8.0 Angel Investor Tax Credit 2.0 Research and Development Tax Credit 40.0 Renewable Chemical Production Tax Credit 5.0 Current Iowa Code Section 15.119 Award Caps ($170.0 Million Aggregate Total) Business Development Tax Credit Programs Award Caps ($110.0 Million Aggregate Total)

Renewable Chemical and Sustainable Aviation

Fuel Production Tax Credits 10.0

• Modifies the small-city allocation of the Workforce Housing Tax Incentives Program from $17.5 million annually to 50.0% of the annual aggregate tax credit limit.

Background

2021 Iowa Acts, chapter 177 (Taxation and Other Provisions Act), increased the prior $25.0 million aggregate tax credit limit for the Workforce Housing Tax Incentives Program to $40.0 million in FY 2022 and $35.0 million annually in fiscal years beginning in FY 2023. The Act also increased the local set-aside for the Program from $10.0 million to $17.5 million beginning in FY 2023.

Assumptions

• Modification of the small-city allocation of the Workforce Housing Tax Incentives Program has no fiscal impact.
• The full amount of the updated aggregated annual caps will be awarded each year.
• 78.9% of awards will be investment tax credits and 21.1% will be sales and use tax refunds, based on Program history.
• An increase in investment tax credits due to Division II of the Bill will begin to be awarded for tax year (TY) 2025, 20.0% of which are claimed against the individual income tax, 20.0% against the corporate income tax, and 60.0% against the insurance premium tax.
• The initial fiscal impact for claims under the Bill will begin in FY 2026.
• According to the IDR, it is assumed that 75.0% of the investment tax credits will be claimed, with the timing of claims indicated below:
• Year 0 = 19.1%
• Year 1 = 35.5%
• Year 2 = 17.6%
• Year 3 = 2.6%
• Year 4 = 0.1%
• Year 5 = 0.1%
• Year 6 = 0.0%
• According to the IDR, it is assumed that 97.9% of sales and use tax refunds will be claimed, with the timing of claims indicated below:
• Year 0 = 68.6%
• Year 1 = 29.3%
• Year 2 = 0.0%
• 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 Fiscal Note, the surtax is assumed to equal 2.5% of State individual income tax liability.

Fiscal Impact

The estimated increase in the maximum amount of the Workforce Housing Tax Credit in Division II of the Bill is projected to decrease net General Fund revenue by the following amounts:

• FY 2026 = $1.3 million
• FY 2027 = $2.0 million
• FY 2028 = $1.1 million
• FY 2029 = $0.3 million

The increase in investment tax credits is projected to decrease the statewide local option income surtax for schools by the following amounts:

• FY 2026 = $3,000
• FY 2027 = $7,000
• FY 2028 = $5,000
• FY 2029 = $2,000

Division III — Business Incentives for Growth (BIG) Program

Description

Division III of the Bill:

• Creates the BIG Program administered by the IEDA, with awards not authorized before January 1, 2026, to provide tax incentives to an eligible business that is primarily engaged in advanced manufacturing, bioscience, insurance and finance, or technology and innovation. Division III specifies that the business cannot be a data center, a retail business, or a business where a cover charge or membership requirement restricts individuals from entering the business.
• Authorizes an annual award cap for the Program not to exceed $50.0 million. The current HQJ Program, predecessor to the BIG Program, is eliminated in Division IV of the Bill.
• Requires any project that will result in elevated water consumption by a business to be accompanied by a water conservation and reduction plan.
• Specifies that the value of a business’s tax incentive may be negotiated between the IEDA and the business; however, the aggregate value of the tax incentive for an eligible business cannot exceed 5.0%, if in an urban area, or 7.5%, if in a rural area, of the business’s qualifying investment.
• Authorizes the IEDA to collect an application fee determined by the Authority.
• Specifies that an eligible business issued a tax incentive is eligible for a sales and use tax refund. Any contractor or subcontractor making a false report of taxes paid to the IDR is guilty of an aggravated misdemeanor and is liable for payment of the tax and any applicable penalty or interest.
• Allows an eligible business issued a tax incentive to receive an investment tax credit that reduces individual income tax, corporate income tax, franchise tax, or moneys and credits tax liability.
• Requires eligible businesses that receive tax incentives from the Program to annually certify to the IEDA that the businesses comply with any contractual agreement.
• Specifies that the IDR is to remit any tax credit over five years to an eligible business, which may see an increase in tax liability if the business sells, disposes of, razes, or otherwise renders unusable all or part of the land, buildings, or other structures for which the tax credit was claimed.
• Specifies that an eligible business that undergoes a layoff or permanently closes any of its facilities in the State may be subject to a penalty.
• Authorizes the IEDA to prohibit an eligible business receiving a BIG Program tax incentive from receiving other tax incentives or financial assistance granted by the IEDA.
• Authorizes a local government to grant property tax exemptions for a period not to exceed 10 years to eligible businesses granted State tax incentives in the BIG Program.
• Authorizes the establishment of one or more funds within the State Treasury consisting of funds appropriated to the IEDA or otherwise under control of the IEDA to be used for BIG Program financial assistance, if available, or for other authority purposes, including deposits in other authority-controlled funds, providing disaster recovery assistance, or for Program support.
• Specifies that the tax credit is refundable and may be carried forward to the next tax year in place of claiming a refund.
• Authorizes the IEDA to adopt administrative rules to administer the BIG Program. Division III of the Bill is effective upon enactment.

Background

An aggravated misdemeanor is punishable by confinement for no more than two years and a fine of between $855 and $8,540.

“Data center business” is defined in Iowa Code section 423.3(95) as an entity whose business among other businesses is to operate a data center.

“Eligible business” is defined in Division III as a business that meets the requirements of Iowa Code section 15.504, as detailed in the Bill.

Assumptions

The following assumptions are made for Division III of the Bill:

• Eligible projects are placed in service before receiving a tax credit award, which will not take place until TY 2028 and will be claimed beginning FY 2029.
• Tax incentives awarded in TY 2028 will be $15.0 million and increase by $3.0 million each year thereafter until the aggregate amount authorized is reached.
• According to the IDR, 60.9% of awards will be investment tax credits and 39.1% of awards will be sales and use tax refunds, based on historical data of similar tax credit programs.
• According to the IDR, 100.0% of investment tax credits will be claimed based on the timing of claims below:
• Year 0 = 0.0%
• Year 1 = 55.5%
• Year 2 = 33.8%
• Year 3 = 5.3%
• Year 4 = 5.1%
• Year 5 = 0.4%
• According to the IDR, 59.8% of sales and use tax awards will be claimed based on historical claim data below (totals may not sum due to rounding):
• Year 0 = 0.0%
• Year 1 = 2.8%
• Year 2 = 13.3%
• Year 3 = 14.4%
• Year 4 = 6.4%
• Year 5 = 5.1%
• Year 6 = 7.2%
• Year 7 = 9.5%
• Year 8 = 1.3%
• Approximately 15.6% of total tax credits will go unclaimed.
• The tax credit is refundable and will have no impact on the income surtax for schools.
• The following will not change over the projection period: charge, conviction, and sentencing patterns and trends; prisoner length of stay (LOS); revocation rates; plea bargaining; and other criminal justice system policies and practices.
• A delay of six months is assumed from the effective date of this Bill to the date of first entry of affected offenders into the correctional system.
• Marginal costs for county jails cannot be estimated due to a lack of data. For purposes of this analysis, the marginal cost for county jails is assumed to be $50 per day.

Correctional Impact

Division III of the Bill creates a new criminal offense, and while data is not available, a correctional impact is not expected, according to Department of Management (DOM) Criminal Justice Planning. Figure 3 shows estimates for sentencing to State prison, parole, probation, or Community-Based Corrections (CBC) residential facilities; LOS in months under those supervisions; and supervision marginal costs per day for aggravated misdemeanors. Refer to the Legislative Services Agency (LSA) memo addressed to the General Assembly, Cost Estimates Used for Correctional Impact Statements, dated January 13, 2025, for information related to the correctional system.

Figure 3 — Sentencing Estimate and LOS

Minority Impact

Division III of the Bill creates a new criminal offense. As a result, DOM Criminal Justice Planning cannot use existing data to estimate the minority impact of the Bill; however, an impact is not expected. Refer to the LSA memo addressed to the General Assembly, Minority Impact Statement, dated January 13, 2025, for information related to minorities in the criminal justice system.

Fiscal Impact

Division III of the Bill creating the BIG Program is estimated to decrease General Fund revenues by the following amounts:

• FY 2029 = $5.2 million
• FY 2030 = $10.2 million
• FY 2031 = $13.3 million
• FY 2032 = $16.2 million
• FY 2033 = $18.8 million

The administrative fee collected by the IEDA cannot be estimated due to a lack of information. The fiscal impact of the property tax exemption would be borne by local government authorities and is not included in this fiscal analysis due to lack of information. Division IV — Elimination of the High Quality Jobs (HQJ) Program

Description

Division IV of the Bill eliminates the HQJ Program, effective December 31, 2025. The Bill allows any agreement on or before December 31, 2025, by a business and the IEDA related to the Program to remain valid and to continue based on the contractual agreement between the business and the authority. Division IV also preserves a taxpayers’ right to redeem a tax incentive issued, awarded, or allowed before December 31, 2025.

Division IV of the Bill takes effect December 31, 2025.

Background

The HQJ Program, formerly the New Jobs and Income Program, was established in 1994 Iowa Acts, chapter 1008 (Quality Jobs Enterprise Zones — New Jobs and Income Program Act). The IDR reported in the March 2025 Contingent Liabilities Report that tax credit claims totaled approximately $17.6 million in FY 2022, $10.4 million in FY 2023, and $27.1 million in FY 2024. A Supplemental Research Activities Tax Credit is also available to taxpayers approved by the IEDA under the HQJ Program. Tax credit claims from the Supplemental Research Activities Tax Credit totaled approximately $67,000 in FY 2022, $2.4 million in FY 2023, and $3.6 million in FY 2024.Conviction Offense Class

Percent

Ordered to

State Prison

FY2024 Avg

LOSin Prison

(All Releases)

Marginal Cost

Per Prison

Day

Percent

Ordered to

Probation

FY24 Field Avg

LOSon

Probation

Avg Cost Per

Day on

Probation

Marginal Cost

Per Day CBC

Marginal Cost

Per Day Jail

FY24 Field Avg

LOSon Parole

Marginal Cost

Per Day

Parole

Aggravated Misdemeanor Persons 48.9% 9.5 $24.51 58.9% 26.0 $7.68 $18.37 $50.00 22.5 $7.68

Assumptions

• High Quality Jobs Program awards beginning in TY 2025 (FY 2026) that will no longer be awarded are estimated at $36.3 million, increasing annually by 2.3% inflation.
• Awards are made to developers at 50.0% of the current estimated amount during FY 2026 due to the elimination of the Program as of December 31, 2025.
• The tax credit redemption pattern is assumed to be:
• Year 1 = 10.0%
• Year 2 = 35.0%
• Years 3-5 = 6.0% per year
• Expiring without redemption = 37.0%
• The income surtax for schools is a local option tax that is based on a taxpayer’s Iowa income tax liability. Law changes that increase Iowa income tax liability also increase 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. Approximately 20.0% of HQJ investment tax credit claims are expected to be claimed against the individual income tax.

Fiscal Impact

Division IV of the Bill eliminating the HQJ Program is estimated to increase General Fund revenues by the following amounts:

• FY 2027 = $1.8 million
• FY 2028 = $10.1 million
• FY 2029 = $17.9 million
• FY 2030 = $20.5 million
• FY 2031 = $23.2 million
• FY 2032 = $24.8 million
• FY 2033 = $25.4 million

Division IV of the Bill is also expected to increase the income surtax for schools by the following amounts:

• FY 2027 = $7,000
• FY 2028 = $40,000
• FY 2029 = $72,000
• FY 2030 = $82,000
• FY 2031 = $93,000
• FY 2032 = $99,000
• FY 2033 = $102,000

Division V — High Quality Jobs Program — Conforming Changes

Description

Division V of the Bill:

• Makes conforming changes to the Iowa Code due to the elimination of the HQJ Program.
• Authorizes counties to initiate action to recover the value of property taxes not collected if an investor fails to comply with requirements for the Redevelopment Tax Credit Program. Division V of the Bill takes effect December 31, 2025.

Background

Iowa Code section 15.332 allows HQJ Program applicants to access a property tax exemption not to exceed a period of 20 years, if approved by a local government, as one of the financial incentives associated with the program.

Fiscal Impact

Division V of the Bill has no fiscal impact on the State.

Division VI — Seed Investor Tax Credit Program and Innovation Fund Investment Tax

Credits

Description

Division VI of the Bill:

• Creates the Seed Investor Tax Credit (Seed) Program that allows a tax credit, for tax years beginning on or after January 1, 2025, against the individual income tax, corporate income tax, franchise tax, insurance premium tax, and the moneys and credits tax for a portion of a taxpayer’s investment in a qualifying business.
• Specifies the tax credit amount to equal 20.0% of the taxpayer’s equity investment if the qualifying business is in an urban area at the time of the investment and 35.0% of the taxpayer's equity investment if the qualifying business is in a rural area at the time of the investment.
• Sets the maximum amount of tax credits issued per fiscal year to a corporation or a person and the person’s spouse or dependent to $100,000.
• Specifies that the maximum amount of tax credits issued per fiscal year for equity investments in any one qualifying business is not to exceed $500,000.
• Requires the IEDA to include as part of the annual report to the IEDA Board and the General Assembly a listing of eligible qualifying businesses for the Seed Investor Tax Credit, the number of tax credit certificates, and the value of tax credits issued by the authority in each fiscal year.
• Modifies existing Innovation Fund Tax Credit program binding investments and commitments from a minimum of $15.0 million to a minimum of $3.0 million.
• Specifies that the Seed Investor Tax Credit is not transferable and cannot be carried back to a prior tax year.
• Specifies that the Seed Investor Tax Credit is refundable or may be carried forward to the next tax year.
• Requires the IEDA to develop administrative rules to administer the Seed Program.

Background

The Bill requires any business that qualifies for the Seed Program to establish that its owners,