Tax Reform Bill Awaits Governor’s Approval

February 24, 2022

In a fast-moving agreement between Gov. Kim Reynolds, the Iowa House and Iowa Senate, lawmakers took legislative action on a sweeping tax reduction and reform proposal. With the Senate acting first, HF 2317 (as amended by S-5022) passed 32-16 and the House agreed to the bill with a vote of 61-34 Thursday evening. After the bill passed the Legislature, the Governor issued a statement applauding the efforts of the Legislature. The bill creates a 3.9% personal income flat tax, eliminates taxes on retirement income and removes capital gains taxes from ESOP holdings. Additional changes to cash rent income for retired farmers and capital gains on the sale of farmland were also included. In addition to the tax reductions and tax exemptions, changes were also made to the Research and Activities Credit that will limit the credit by disallowing materials used in research and reducing the refundability of the credit to 50%.

A division by division description of the bill is here:

  • Division 1: Eliminates the capital gains tax on the sale of ESOP shares of qualified businesses to allow employee owners to receive this retirement benefit tax free.
  • Division 2: Eliminates the tax on income from the lease of farmland by retired farmers to provide tax free retirement income.
  • Division 3: Eliminates the capital gains tax from the sale of farm land for retired farmers to provide tax free retirement income.
  • Division 4: Steps down the Iowa personal income tax through 2026 to reach 3.9%
  • Division 5: Establishes the 3.9% rate as a flat rate for all income groups.
  • Division 6: Removes taxation from all categories of retirement income.
  • Division 7: Makes changes to the Research and Activities Credit:
    • Reduces the value of supplies that can qualify for the credit to zero over time.
    • Reduces the refundability of the credit to 50% over time.
  • Division 8: Prioritizes the RAC credit provisions within the High Quality Jobs Tax Credit, ends the Geothermal Heat Pump Credit and places limits on the Endow Iowa Tax Credit. This section also limits refundability of the historic preservation, redevelopment and third-party developer tax credits.
  • Division 9: Creates a contingent corporate tax reduction mechanism that reduces the rate of corporate taxes following a year in which more than $700 million in net corporate taxes are collected.
  • Division 10: Caps the final corporate income tax rate at a flat 5.5%
  • Division 11: Eliminates the Tax Expenditure Committee of the Legislative Council
  • Division 12: Creates a mechanism to draw revenue from the Taxpayer Relief Fund to the General Fund as needed.

For greater detail on the impact of each division please refer to the fiscal note developed for amendment S-5022 here.