Iowa Senate passes inheritance, acceleration of income tax reductions bill despite fiscal dilemmas

(The Center Square) – The Iowa Senate unanimously passed a bill that would phase out the state’s inheritance tax over a three-year period, eliminating it completely in 2024.

SF 576, passed March 17, requires inheritance taxes be reduced 25% in 2021, reduced another 50% in 2022, and another 75% in 2023, and all amounts would be rounded to the nearest one-hundredth of 1%. While inheritances received by spouses, children, grandchildren, parents and grandparents are currently exempt from tax in Iowa, property passing to siblings, their spouses, children-in-law, and other relatives – or for-profit organizations or companies – is subject to tax that depends on the value of the estate. For bequests for religious services above $500, the rate is 10%.

Inheritance tax revenue is projected to grow 3.5% annually after fiscal year 2022 under current law, according to the fiscal note. The Department of Revenue estimates the tax year 2023 change will reduce individual income tax liability by $297.6 million in tax year 2023, $43.7 million in tax year 2024, and $8 million per tax year from tax year 2025.

The bill also will trigger requirements for certain changes to individual income tax liability, effective Jan. 1, 2023.

Currently, the tax changes under 2018 Iowa Acts, chapter 1161, Division IX, require two triggers. The first trigger is if actual general fund net revenue at the end of a fiscal year reaches $8.32 billion. The second trigger is if the general fund exceeds 104% of the previous fiscal year’s actual general fund net revenue, according to the fiscal note on SF 576.

The Revenue Estimating Council estimated in December 2020 that the fiscal year 2022 General Fund would be $48.9 million below the dollar trigger and 0.3 percentage points below the required growth trigger. The projection does not mean that the triggers “will not or cannot be met” at the end of fiscal year 2022 but that they are not “projected to be met for FY2022 at this time,” the note said.

Common Good Iowa Deputy Director Mike Owen argued in a March 11 column that the bill may impact the benefits the state is anticipating from the American Rescue Plan Act (ARPA) as “any changes in law that cause revenue cuts (tax cuts) during the covered period of March 3, 2021, through Dec. 31, 2024, will reduce the COVID relief by the same amount.” Common Good Iowa has lobbied against the bill.

Iowa has been allocated an estimated $1.38 billion under the ARPA.

Common Good Iowa also presented written testimony March 9 to the Senate in which it criticized the bill as being “rushed through the process when there is no immediate deadline on tax bills” since the Senate’s Ways and Means Committee advanced the bill March 10, prior to the Legislative Services Agency’s issuance of the fiscal note on March 12.

The fiscal note projected the general fund revenue in fiscal year 2024 would lose $288.9 million.

“Iowa does have the financial capacity to deal with these priorities, and Senate Republicans will ensure that these priorities will be part of the final discussion to close out this session. … [Regarding] the federal Cares Act money, the last-minute restrictions placed on last week’s legislation, let me simply say this: The federal government will not trounce over states’ rights and freeze tax policy for the next two years here in Iowa,” the bill’s floor manager, Sen. Dan Dawson, R-Council Bluffs, said on the floor of the Senate.

He added that “if our federal government overlords wish to continue down this path of a massive Constitutional overreach” then he predicts “it’s very likely that the states will see the federal government in court.”

Sen. Pam Jochum, D-Dubuque, who voted against the bill in the Ways and Means Committee, voted in favor of the bill on Wednesday despite her concerns about “the unknowns.” She said trying to end “federal deductibility is something Democrats have wanted to do for as long as I’ve been here” because it has hurt efforts to bring businesses to the state, but the triggers had been put into the law to ensure the state would be “very fiscally responsible” since the transition is “very costly.”

Jochum said she supports the individual income tax cuts because “it’s very probable that we will hit those triggers before 2024.”

The Iowa Association of Business and Industry has lobbied in support of the bill.

“Eliminating the tax triggers from the 2018 tax reform law will provide predictability, certainty and more opportunity for businesses to invest in their companies and team members,” Iowa Association of Business and Industry Director, Public Policy, Brad Hartkopf told The Center Square in an emailed statement. He said the inheritance tax portion of the bill addresses “an equity issue.”

“This pro-growth legislation will enhance and strengthen Iowa’s tax climate by ultimately providing tax relief not only for businesses, but also for families and individuals who live, work and play in our state,” Hartkopf said.

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