Public Policy Update - State Tax Reform

Feb 23, 2018

On Wednesday, Senate Republicans in the Iowa legislature introduced their version of tax reform. You may recall that Governor Reynolds' tax reform legislation was introduced last week (HSB671). There are some significant differences in the two different pieces of legislation. Most notably, the Senate version includes corporate tax reform, where the House and governor’s version currently calls only for a task force to study the corporate tax structure to make recommendations at a later date.

The Senate bill (SF2383) has already seen movement by a party line vote in the Senate Ways & Means Committee, making it now eligible to see floor debate. That can happen as early as next week. We also anticipate seeing a fiscal note provided by the non-partisan Legislative Services Agency (LSA) before any floor action in the Senate.

We are pleased to see corporate tax reform included in the Senate’s bill, as this is reform the Economic Alliance has advocated for many years. Iowa remains 40th for business climate in the Tax Foundation’s 2018 State Business Tax Climate Index. Complexity is a driving factor in Iowa’s poor ranking and makes us less competitive when working to recruit and retain businesses in Iowa.

Proposed changes to the current tax code include:
  • Drops Iowa’s top corporate rate of 12% (the highest in the country) to 7.0%.
  • Eliminates federal deductibility under both the Iowa individual and corporate tax.
  • Eliminates Alternative Minimum Tax for both individuals and corporations.
  • Automatically couples state code to new federal tax code changes.

Of concern in the Senate’s bill are the proposed changes to many of the state’s economic development tax credits programs, including the phasing out of some of the programs most used in our region. These incentive tools, and others, allow Iowa to be competitive in landing projects, expanding current Iowa businesses and providing quality jobs and wages. With our partners across the state, the Economic Alliance will strongly advocate to maintain these tools and achieve meaningful tax reform for all sizes and types of businesses.Here are more highlights important for businesses in the Sentate's proposed legislation:

Iowa Working Families Tax Relief Act
SF2383 introduced by Senate Ways & Means Chair Randy Feenstra (R-Hull)

Business highlights included under the Act:

  • Provides minimum coupling in FY2018, includes 529 and Educator expense.
  • In the future, will automatically couple to new federal tax code changes.
  • Eliminates federal deductibility under both the Iowa individual and corporate tax.
  • Excludes from state income employer-provided payments to an employee or lender for the principal or interest on any qualified education loan incurred by the employee.
  • Iowa business owners will be able to fully utilize the new federal benefit (IRC Section 199A) of a 20% deduction on all qualified business income. Farmers could potentially be provided a significantly larger Section 199A deduction.
  • Drops Iowa’s top corporate rate of 12%, the highest in the country, to 7.0%.
  • Eliminates Alternative Minimum Tax for both individuals and corporations.
  • Institutions providing financial services will now both pay the same new financial institution tax structure.
  • Enforces sales tax from online purchases.
  • Clarifies and limits the definition of “manufacturer” for purposes of sales tax exemption for the sale or rental of computers, machinery and equipment if used by a manufacturer.
  • Clarifies sale tax law as to when tax is due related to construction equipment dealer.

Iowa Tax Credits
The plan sets to sunset additional or allow for no new claims under the following programs:

  • High Quality Jobs Program (HQJP)
  • Historic Preservation and Cultural & Entertainment District Tax Credit
  • Ethanol Promotion Tax Credit
  • Solar Energy Systems Tax Credit
  • Geothermal Tax Credit
  • Farm to Food Donation Tax Credit
  • Accelerated Career Education Tax Credit
  • Targeted Jobs Tax Credit
  • Tuition and Textbooks Tax Credit
  • Volunteer Firefighter/EMS/Reserve Peace Officer Tax Credit
  • Taxpayer Trust Fund – due to new indexing of rates

New restrictions will be added to current tax credits:

  • The tax credit cap will be lowered for the HQJP
  • The tax credit cap will be lowered under the Historic Preservation and Cultural & Entertainment District Tax Credit
  • No new distribution centers will be allowed to receive tax credits under the HQJP
  • No new data centers will be allowed to use the HQJP tax credit
  • Industry restriction will be added under the Research Activities Tax Credit (RAC) - The credits will only be available to businesses engaged in the manufacturing, life sciences, software engineering, or aviation and aerospace industry)
  • Refundability will be eliminated under the Supplemental RAC within the HQJP.

Limited Iowa Tax Credits will be enhanced:

  • The agriculture asset transfer tax credit
  • The School Tuition Organization Tax Credit
  • The Workforce Housing Tax Incentive Program
  • The Venture Capital Tax Credit – Qualifying Business (Angel Investor Tax Credit)

Additional work moving forward: The Iowa Tax Expenditure Committee will be tasked with reshaping the future of Iowa’s tax credits. The new tax credit system will put Iowa in the best position for attracting and retaining business and industry and jobs in Iowa and provide greater predictability and accountability to the Iowa taxpayer.



Category: Public Policy

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