HSB 720 (LSB 5025YC (1) 90)

HOUSE FILE _____ 

BY  (PROPOSED COMMITTEE ON WAYS AND MEANS BILL BY CHAIRPERSON KAUFMANN)

A BILL FOR

An Act relating to state taxation by modifying future individual income tax rates, creating processes for reducing the individual income tax rate to zero, reducing future contingent corporate income tax rates, making appropriations, and including effective date, applicability, and retroactive applicability provisions.
BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:

DIVISION I
CREATION OF TAXPAYER RELIEF TRUST FUND, INCOME TAX ELIMINATION FUND AND BOARD

    Section 1.  Section 2.46, Code 2024, is amended by adding the following new subsection:
   NEW SUBSECTION.  6.  Income tax elimination board.  Beginning on or after July 1, 2026, and each fiscal year thereafter until the individual income tax is zero, schedule a meeting to examine and discuss the actions taken by the income tax elimination board in the previous fiscal year.
    Sec. 2.  Section 8.54, subsection 1, paragraph b, Code 2024, is amended to read as follows:
   b.  “New revenues” means moneys which are received by the state due to increased tax rates and fees or newly created taxes and fees over and above those moneys which are received due to state taxes and fees which are in effect as of January 1 following the December state revenue estimating conference. “New revenues” also includes moneys received by the general fund of the state due to new transfers over and above those moneys received by the general fund of the state due to transfers which are in effect as of January 1 following the December state revenue estimating conference. The department of management shall obtain concurrence from the revenue estimating conference on the eligibility of transfers to the general fund of the state which are to be considered as new revenue in determining the state general fund expenditure limitation.  However, “new revenues” does not include transfers to the general fund of the state from the income tax elimination fund pursuant to section 97E.4 that occur during the fiscal year immediately proceeding the fiscal year for which the adjusted revenue estimate is determined.
    Sec. 3.  Section 8.57E, subsection 2, paragraph a, Code 2024, is amended to read as follows:
   a.  Except as otherwise provided in this section, moneys in the taxpayer relief fund shall only be used pursuant to appropriations or transfers made by the general assembly to the taxpayer relief trust fund in section 97E.3 or the income tax elimination fund in section 97E.4 or for tax relief or reductions in income tax rates. 
    Sec. 4.  Section 8.57E, Code 2024, is amended by adding the following new subsection:
   NEW SUBSECTION.  2A.  a.  On July 1, 2024, there is transferred from the taxpayer relief fund to the income tax elimination fund created in section 97E.4, one hundred million dollars for administrative purposes under chapter 97E.
   b.  On January 1, 2025, there is transferred from the taxpayer relief fund to the taxpayer relief trust fund created in section 97E.3, two billion six hundred million dollars for the purpose of producing investment returns for deposit into the income tax elimination fund.
   c.  For the fiscal year beginning July 1, 2026, and each fiscal year thereafter, there is transferred from the taxpayer relief fund to the taxpayer relief trust fund created in section 97E.3, an amount equal to twenty-five percent of the moneys transferred to the taxpayer relief fund during the preceding fiscal year.
    Sec. 5.  Section 12B.10, subsection 6, Code 2024, is amended by adding the following new paragraphs:
   NEW PARAGRAPH.  o.  Investments by the taxpayer relief trust fund established in section 97E.3.
   NEW PARAGRAPH.  p.  Investments by the income tax elimination fund established in section 97E.4.
    Sec. 6.  Section 12B.10C, subsection 4, unnumbered paragraph 1, Code 2024, is amended to read as follows:
   The following entities or funds are not subject to this section:
    Sec. 7.  Section 12B.10C, subsection 4, Code 2024, is amended by adding the following new paragraph:
   NEW PARAGRAPH.  l.  The taxpayer relief trust fund established in section 97E.3.
   NEW PARAGRAPH.  m.  The income tax elimination trust established in section 97E.4.
    Sec. 8.  Section 97B.1, subsection 1, Code 2024, is amended to read as follows:
   1.  The “Iowa Public Employees’ Retirement System” is established as an independent agency within the executive branch of state government. The Iowa public employees’ retirement system shall administer the retirement system established under this chapter, and beginning July 1, 2024, shall administer chapter 97E.
    Sec. 9.  NEW SECTION.  97E.1  Purpose.
   The purpose of this chapter is to create and ensure economic vitality and growth for the benefit of future generations of Iowans by setting aside and protecting moneys today in order to responsibly eliminate the individual income tax in the future.
    Sec. 10.  NEW SECTION.  97E.2  Definitions.
   For the purpose of this chapter and unless otherwise required by the context:
   1.  “Board” means the income tax elimination board.
   2.  “Elimination fund” means the income tax elimination fund.
   3.  “System” means the Iowa public employees’ retirement system as defined in section 97B.1.
   4.  “Trust fund” means the taxpayer relief trust fund.
    Sec. 11.  NEW SECTION.  97E.3  Taxpayer relief trust fund.
   1.  a.  Beginning January 1, 2025, a trust fund is created, separate and apart from all other public moneys or funds of this state and the balance in the trust fund shall not be considered part of the balance of the general fund of the state.
   b.  Notwithstanding section 12C.7, subsection 2, interest or earnings on moneys deposited in the trust fund shall be credited to the fund. Notwithstanding section 8.33, moneys credited to the trust fund shall not revert at the close of a fiscal year.
   2.  The trust fund shall consist of all moneys collected by or appropriated or transferred to the trust fund, together with all interest, dividends, and rents, and shall also include all securities or investment income and other assets acquired by and through the use of the moneys belonging to the trust fund and any other moneys that have been paid into the trust fund.
   3.  a.  The system is hereby made the custodian of the trust fund, and shall administer the trust fund, and shall hold and disburse the trust fund in accordance with the requirements of this chapter. As custodian, the system shall be authorized to disburse moneys in the fund upon warrants drawn by the director of the department of administrative services pursuant to the order of the system.
   b.  The system shall not select any bank or other third party for the purposes of investment asset safekeeping, other custody, or settlement services without prior consultation with and approval of the board.
   c.  The system, subject to board approval, may execute contracts and agreements with investment advisors, consultants, and investment management and benefit consultant firms in the administration of investments of moneys in the trust fund.
   4.  a.  All moneys that are appropriated or otherwise transferred or deposited into the trust fund are appropriated and made available to be used for transfers made to the income tax elimination fund made pursuant to subsection 5.
   b.  The expenses to administer the trust fund shall be as provided in section 97E.5.
   5.  Beginning July 1, 2028, and each July 1 thereafter, five percent of the remaining balance of the trust fund at the close of the preceding fiscal year shall be transferred to the income tax elimination fund created in section 97E.4.
   6.  Moneys in the trust fund, except so much of the trust fund as may be necessary to be kept on hand for the making of disbursements under this chapter, shall be invested by the board in any investments according to the investment policy of the board, and subject to the requirements of chapters 12F, 12H, 12J, and 12K, and the earnings therefrom shall be credited to the fund.
   7.  After the individual income tax rate is adjusted to zero pursuant to section 422.5B, any moneys remaining in the fund shall be transferred to the general fund of the state in the same fiscal year.
    Sec. 12.  NEW SECTION.  97E.4  Income tax elimination fund.
   1.  Commencing July 1, 2024, an income tax elimination fund is created separate and apart from all other public moneys or funds of this state and the balance of the elimination fund shall not be considered part of the balance of the general fund of the state.
   2.  a.  The elimination fund shall consist of all moneys transferred to the elimination fund pursuant to section 97E.3 or appropriated to or otherwise collected by the elimination fund for the purpose of reducing the individual income tax to zero.
   b.  Notwithstanding section 12C.7, subsection 2, interest or earnings on moneys deposited in the income tax elimination fund shall be credited to the elimination fund. Notwithstanding section 8.33, moneys credited to the income tax elimination fund shall not revert at the close of a fiscal year.
   3.  a.  The system is hereby made custodian of the elimination fund, and shall administer the elimination fund, and shall hold and disburse the fund in accordance with the requirements of this chapter. As custodian, the system shall be authorized to disburse moneys in the elimination fund upon warrants drawn by the director of the department of administrative services pursuant to the order of the system.
   b.  The system shall not select any bank or other third party for the purposes of investment asset safekeeping, other custody, or settlement services without prior consultation with and approval of the board.
   c.  The system, subject to board approval, may execute contracts and agreements with investment advisors, consultants, and investment management and benefit consultant firms in the administration of investments of moneys in the elimination fund.
   4.  a.  All moneys that are appropriated or otherwise transferred or deposited into the elimination fund are appropriated and made available to be used for transfers to the general fund as provided in section 422.5B.
   b.  The expenses to administer the elimination fund shall be as provided in section 97E.5.
   5.  Moneys in the elimination fund, except so much of the elimination fund as may be necessary to be kept on hand for the making of disbursements under this section, shall be invested by the board in investments authorized for the Iowa public employees’ retirement system in section 97B.7A, and subject to the requirements of chapters 12F, 12H, 12J, and 12K, and the earnings therefrom shall be credited to the fund.
   6.  After the individual income tax rate is adjusted to zero pursuant to section 422.5B, any moneys remaining in the elimination fund shall be transferred to the general fund of the state in the same fiscal year.
    Sec. 13.  NEW SECTION.  97E.5  Expenses.
   1.  The investment management and administrative expenses for the trust fund and elimination fund shall be charged against the investment income of the elimination fund.
   2.  The total expenses for investment management and administration of the trust fund and elimination fund shall not exceed two million dollars in the aggregate per year.
    Sec. 14.  NEW SECTION.  97E.6  Income tax elimination board.
   1.  Beginning July 1, 2024, a board is established. The duties of the board are to establish and implement policy in matters relating to the investment of the trust fund and the elimination fund. The board shall be the trustee of the trust fund and the elimination fund.
   2.  a.  At least annually the board shall have a public meeting and review the investment policies and procedures used by the board and system. Following the review and a public meeting, the board shall, pursuant to the requirements of section 97E.7, and in consultation with the chief investment officer of the system and other relevant personnel of the system, establish an investment policy and goal statement that shall direct the investment activities concerning each fund.
   b.  The board shall review and approve, prior to the execution of a contract with the system, the hiring of each investment manager and investment consultant outside of state government.
   c.  The board shall review and approve the selection of any bank used by the system pursuant to this chapter.
   3.  a.  The board shall consist of eleven members, including seven voting members and four nonvoting members.
   b.  (1)  The voting members shall be as follows:
   (a)  Four public members, appointed by the governor who each have substantial experience in institutional investments, institutional finance, or other business management.
   (b)  Two public members, appointed by the governor who are citizens of the state.
   (c)  The director of the department of management.
   (2)  A voting member shall not hold other office or position under the laws of this state, or any other state or territory or of the United States.
   c.  The nonvoting members of the board shall be two state representatives, one appointed by the speaker of the house of representatives and one by the minority leader of the house, and two state senators, one appointed by the majority leader of the senate and one by the minority leader of the senate.
   d.  Four voting members of the board shall constitute a quorum.
   e.  The four members who have substantial institutional investment experience or substantial institutional financial experience shall be paid actual expenses incurred as a member and shall receive a per diem as specified in section 7E.6 for each day of service not exceeding forty days per year. Legislative members shall be paid the per diem and expenses specified in section 2.10, for each day of service. The per diem and expenses of the legislative members shall be paid from funds appropriated under section 2.12. The two remaining public members and the director of the department of management shall be paid actual expenses incurred as members of the board and such performance as members of the board shall not affect benefits such as salary, vacation accrual, or a leave of absence for sickness or injury.
   f.  The appointive terms of the members appointed by the governor are for six-year staggered terms whose initial terms shall be designated by the governor beginning and ending as provided in section 69.19. If there is a vacancy in the membership of the board for one of the members appointed by the governor, the governor has the power of appointment. Gubernatorial appointees to this board are subject to confirmation by the senate.
   4.  a.  Prior to any rule or policy adopted by the board, the board shall notify the fiscal committee of the legislative council the content of any rule or policy by electronic means, and shall provide the fiscal committee at least ten days to comment on the rule or policy before adopting the rule or policy.
   b.  Beginning on or after July 1, 2026, and each fiscal year thereafter, the board shall report to the fiscal committee of the legislative council including the investment decisions, transfers, and any other actions taken by the board in the previous fiscal year.
    Sec. 15.  NEW SECTION.  97E.7  Investment and management of funds —— standards —— immunity.
   1.  In establishing the investment policy of the trust fund and elimination fund and providing for the separate investment of each fund, the system and board shall do the following:
   a.  Exercise the judgment and care, under the circumstances then prevailing, which persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not for the purpose of speculation, but with regard to the permanent disposition of the funds, considering the probable income, as well as the probable safety, of their capital.
   b.  Give appropriate consideration to those facts and circumstances that the system and board know or should know are relevant to the particular investment or investment policy involved, including the role the investment plays in the total value of each fund.
   c.  For the purposes of this subsection, appropriate consideration includes a determination that the particular investment or investment policy is reasonably designed to further the purposes of each fund, taking into consideration the risk of loss and the opportunity for gain or income associated with the investment or investment policy and consideration of the following factors as they relate to each fund:
   (1)  The composition of the fund with regard to diversification.
   (2)  The liquidity and current return of the investments in the fund relative to the anticipated cash flow requirements of the fund.
   (3)  The projected return of the investments relative to the funding objectives of the fund.
   2.  Within the limitations of the investment standards prescribed in this section, the system may acquire and retain every kind of property and every kind of investment which persons of prudence, discretion, and intelligence acquire or retain for their own account. Consistent with this section, investments shall be made in a manner that will enhance the economy of this state, and in particular, will result in increased employment of the residents of this state. Investments of moneys in each fund are not subject to sections 73.15 through 73.21.
   3.  Except as provided in subsection 6, if there is loss to either fund, the system, the employees of the system, the members of the board severally, and the board are not personally liable, and the loss shall be charged against the appropriate fund. There is appropriated from the appropriate fund the amount required to cover a loss.
   4.  In managing the investment of either fund, the system, in accordance with the investment policy established by the board, is authorized to do the following:
   a.  To sell any securities or other property in either fund and reinvest the proceeds when such action may be deemed advisable by the system for the protection of the applicable fund or the preservation of the value of the investment. Such sale of securities or other property of either fund and reinvestment shall only be made in accordance with policies of the board in the manner and to the extent provided in this chapter.
   b.  To subscribe for the purchase of securities for future delivery in anticipation of future income. The securities shall be paid for by anticipated income or from funds from the sale of securities or other property held by the applicable fund.
   c.  To pay for securities directed to be purchased upon the receipt of the purchasing bank’s paid statement or paid confirmation of purchase.
   5.  In the administration of the investment of moneys in each fund, employees of the system and members of the board may travel outside the state for the purpose of meeting with investment firms and consultants and attending conferences and meetings to fulfill their fiduciary responsibilities.
   6.  The system, employees of the system, the board, the members of the board, and the treasurer of state are not personally liable for actions or omissions under this chapter that do not involve malicious or wanton misconduct even if those actions or omissions violate the standards established in this section.
    Sec. 16.  NEW SECTION.  422.5B  Reduction of individual income tax rates.
   1.  For tax years beginning on or after January 1, 2029, and notwithstanding the individual income tax rate in section 422.5, the department of revenue shall determine the individual income tax rate as provided in this section. The tax rate in effect in section 422.5 shall remain in effect until the rate is adjusted pursuant to subsection 2. A rate adjusted in subsection 2 shall remain in effect until the rate is adjusted again pursuant to this section.
   2.  a.  Before November 1, 2028, and before November 1 each year thereafter, until the individual income tax rate is adjusted to zero, the department of management shall determine the amount of money available in the income tax elimination fund in section 97E.4, and the net individual income tax receipts at the close of the preceding fiscal year. The amount available in the income tax elimination fund and the net tax receipts shall be provided to the department of revenue for the calculation in paragraph “b”.
   b.  By November 1, 2028, and by November 1 each year thereafter, the department of revenue shall adjust the individual income tax rate as provided in this paragraph if all of the following apply:
   (1)  The amount of net sales and use tax revenue collected by the state during the most recent October 1 through September 30 calculation period is greater than one hundred three percent of the net sales and use tax revenue collected during the immediately preceding calculation period covering the same months.
   (2)  The rate is able to be adjusted downward at least one-tenth of one percent in such a way that the proposed adjusted rate would have generated an amount equal to the net individual income tax receipts generated from the rate in the preceding fiscal year less any transfer amount from the income tax elimination fund in section 97E.4.
   (3)  There is at least one hundred fifty percent of the amount to be transferred to the general fund pursuant to subsection 3 available in the income tax elimination fund in section 97E.4. 
   c.  If a determination is made by the department of revenue that the rate is subject to adjustment, the department of revenue shall adjust the rate specified in section 422.5, or if the rate has been previously adjusted, adjust the previously adjusted rate.
   3.  If an adjustment is made pursuant to subsection 2, one hundred fifty percent of the amount of moneys in the income tax elimination fund used in the calculation in subsection 2 shall be transferred to the general fund of the state in the fiscal year the rate is adjusted.
   4.  If a rate is adjusted pursuant to subsection 2, the director of revenue shall cause an advisory notice containing the new individual income tax rate to be published in the Iowa administrative bulletin and on the internet site of the department of revenue. The calculation and publication of the adjusted tax rate by the director of revenue is exempt from chapter 17A, and shall be submitted for publication by the first December 31 following the determination date to adjust the rate.
DIVISION II
INDIVIDUAL INCOME TAX RATES

    Sec. 17.  Section 421.27, subsection 9, paragraph a, subparagraph (3), Code 2024, is amended to read as follows:
   (3)  In the case of all other entities, including corporations described in section 422.36, subsection 5, and all other entities required to file an information return under section 422.15, subsection 2, the entity’s Iowa net income after the application of the Iowa business activity ratio, if applicable, multiplied by the top income tax rate imposed under section 422.5 or 422.5A, as applicable, for the tax year, less any Iowa tax credits available to the entity.
    Sec. 18.  Section 422.5, subsection 1, paragraph a, Code 2024, is amended to read as follows:
   a.  (1)  A tax is imposed upon every resident and nonresident of the state which tax shall be levied, collected, and paid annually upon and with respect to the entire taxable income as defined in this subchapter at rates as provided in section 422.5A.  This subparagraph is repealed January 1, 2026.
   (2)  Commencing with tax years beginning on or after January 1, 2026, but before January 1, 2027, a tax is imposed upon every resident and nonresident of the state which tax shall be levied, collected, and paid annually upon and with respect to the entire taxable income as defined in this subchapter at a rate of three and seven hundred seventy-five thousandths percent.
   (3)  Commencing with tax years beginning on or after January 1, 2027, a tax is imposed upon every resident and nonresident of the state which tax shall be levied, collected, and paid annually upon and with respect to the entire taxable income as defined in this subchapter at a rate of three and sixty-five hundredths percent.
    Sec. 19.  Section 422.5A, subsection 1, paragraph a, subparagraphs (2) and (3), Code 2024, are amended to read as follows:
   (2)  For the tax year beginning on or after January 1, 2024, but before January 1, 2025:
   (a)  On taxable income from 0 through $12,000 $12,420, the rate of 4.40 3.90 percent.
   (b)  On taxable income exceeding $12,000 $12,420 but not exceeding $60,000 $62,100, the rate of 4.82 percent.
   (c)  On taxable income exceeding $60,000 $62,100, the rate of 5.70 percent.
   (3)  For the tax year beginning on or after January 1, 2025, but before January 1, 2026:
   (a)  On taxable income from 0 through $12,000 $25,000, the rate of 4.40 3.90 percent.
   (b)  On taxable income exceeding $12,000 $25,000, the rate of 4.82 percent.
    Sec. 20.  Section 422.5A, subsection 1, paragraph b, subparagraphs (2) and (3), Code 2024, are amended to read as follows:
   (2)  For the tax year beginning on or after January 1, 2024, but before January 1, 2025:
   (a)  On taxable income from 0 through $6,000 $6,210, the rate of 4.40 3.90 percent.
   (b)  On taxable income exceeding $6,000 $6,120 but not exceeding $30,000 $31,050, the rate of 4.82 percent.
   (c)  On taxable income exceeding $30,000 $31,050, the rate of 5.70 percent.
   (3)  For the tax year beginning on or after January 1, 2025, but before January 1, 2026:
   (a)  On taxable income from 0 through $6,000 $12,500, the rate of 4.40 3.90 percent.
   (b)  On taxable income exceeding $6,000 $12,500, the rate of 4.82 percent.
    Sec. 21.  Section 422.16, subsection 2, paragraph e, Code 2024, is amended to read as follows:
   e.  For the purposes of this subsection, state income tax shall be withheld at the highest rate described in section 422.5 or 422.5A, as applicable, from supplemental wages of an employee in those circumstances in which the employer treats the supplemental wages as wholly separate from regular wages for purposes of withholding and federal income tax is withheld from the supplemental wages under section 3402(g) of the Internal Revenue Code.
    Sec. 22.  Section 422.16B, subsection 2, paragraph a, Code 2024, is amended to read as follows:
   a.  (1)  A pass-through entity shall file a composite return on behalf of all nonresident members and shall report and pay the income or franchise tax imposed under this chapter at the maximum state income or franchise tax rate applicable to the member under section 422.5, 422.5A, 422.33, or 422.63 on the nonresident members’ distributive shares of the income from the pass-through entity.
   (2)  The tax rate applicable to a tiered pass-through entity shall be the maximum state income tax rate under section 422.5 or 422.5A, as applicable.
    Sec. 23.  Section 422.16C, subsection 4, paragraph a, Code 2024, is amended to read as follows:
   a.  A taxpayer making an election under this section shall be subject to tax in an amount equal to the maximum rate under section 422.5 or 422.5A, as applicable, imposed against the taxable income of the taxpayer for the taxable year properly determined under this chapter and allocated and apportioned to the state under the rules adopted by the department. The tax shall be due with the taxpayer’s return required under this chapter.
    Sec. 24.  Section 422.25A, subsection 5, paragraph c, subparagraphs (3), (4), and (5), Code 2024, are amended to read as follows:
   (3)  Determine the total distributive share of all final federal partnership adjustments and positive reallocation adjustments as modified by this title that are reported to nonresident individual partners and nonresident fiduciary partners and allocate and apportion such adjustments as provided in section 422.33 at the partnership or tiered partner level, and multiply the resulting amount by the maximum individual income tax rate pursuant to section 422.5 or 422.5A, as applicable, for the reviewed year.
   (4)  For the total distributive share of all final federal partnership adjustments and positive reallocation adjustments as modified by this title that are reported to tiered partners:
   (a)  Determine the amount of such adjustments which are of a type that would be subject to sourcing to Iowa under section 422.8, subsection 2, paragraph “a”, as a nonresident, and then determine the portion of this amount that would be sourced to Iowa under those provisions as if the tiered partner were a nonresident.
   (b)  Determine the amount of such adjustments which are of a type that would not be subject to sourcing to Iowa under section 422.8, subsection 2, paragraph “a”, as a nonresident. 
   (c)  Determine the portion of the amount in subparagraph division (b) that can be established, as prescribed by the department by rule, to be properly allocable to indirect partners that are nonresident partners or other partners not subject to tax on the adjustments.
   (d)  Multiply the total of the amounts determined in subparagraph divisions (a) and (b), reduced by any amount determined in subparagraph division (c), by the highest individual income tax rate pursuant to section 422.5 or 422.5A, as applicable, for the reviewed year. 
   (5)  For the total distributive share of all final federal partnership adjustments and positive reallocation adjustments as modified by this title that are reported to resident individual partners and resident fiduciary partners, multiply that amount by the highest individual income tax rate pursuant to section 422.5 or 422.5A, as applicable, for the reviewed year.
    Sec. 25.  REPEAL.  2022 Iowa Acts, chapter 1002, sections 19, 20, 21, 22, 23, and 24, are repealed.
    Sec. 26.  RETROACTIVE APPLICABILITY.  The following apply retroactively to January 1, 2024, for tax years beginning on or after that date:
   1.  The portion of the section of this division of this Act amending section 422.5A, subsection 1, paragraph “a”, subparagraph (2).
   2.  The portion of the section of this division of this Act amending section 422.5A, subsection 1, paragraph “b”, subparagraph (2).
DIVISION III
FUTURE CONTINGENT CORPORATE INCOME TAX RATE

    Sec. 27.  Section 422.33, subsection 1, paragraph b, subparagraph (2), subparagraph division (b), subparagraph subdivision (iii), Code 2024, is amended to read as follows:
   (iii)  The tax rates adjusted pursuant to this paragraph shall not be adjusted below five and one-half four and nine-tenths percent.
DIVISION IV
FUTURE CODE EDITING OF INTERNAL REFERENCES

    Sec. 28.  Section 421.27, subsection 9, paragraph a, subparagraph (3), as amended by this Act, is amended to read as follows:
   (3)  In the case of all other entities, including corporations described in section 422.36, subsection 5, and all other entities required to file an information return under section 422.15, subsection 2, the entity’s Iowa net income after the application of the Iowa business activity ratio, if applicable, multiplied by the top income tax rate imposed under section 422.5 or 422.5A, as applicable, for the tax year, less any Iowa tax credits available to the entity.
    Sec. 29.  Section 422.5, subsection 1, paragraph a, as amended by this Act, is amended to read as follows:
   a.  (1)  A tax is imposed upon every resident and nonresident of the state which tax shall be levied, collected, and paid annually upon and with respect to the entire taxable income as defined in this subchapter at rates as provided in section 422.5A. This subparagraph is repealed January 1, 2026.
   (2)  (1)  Commencing with tax years beginning on or after January 1, 2026, but before January 1, 2027, a tax is imposed upon every resident and nonresident of the state which tax shall be levied, collected, and paid annually upon and with respect to the entire taxable income as defined in this subchapter at a rate of three and seven hundred seventy-five thousandths percent.
   (3)  (2)  Commencing with tax years beginning on or after January 1, 2027, a tax is imposed upon every resident and nonresident of the state which tax shall be levied, collected, and paid annually upon and with respect to the entire taxable income as defined in this subchapter at a rate of three and sixty-five hundredths percent.
    Sec. 30.  Section 422.16, subsection 2, paragraph e, as amended by this Act, is amended to read as follows:
   e.  For the purposes of this subsection, state income tax shall be withheld at the highest applicable rate described in section 422.5 or 422.5A, as applicable, from supplemental wages of an employee in those circumstances in which the employer treats the supplemental wages as wholly separate from regular wages for purposes of withholding and federal income tax is withheld from the supplemental wages under section 3402(g) of the Internal Revenue Code.
    Sec. 31.  Section 422.16B, subsection 2, paragraph a, as amended by this Act, is amended to read as follows:
   a.  (1)  A pass-through entity shall file a composite return on behalf of all nonresident members and shall report and pay the income or franchise tax imposed under this chapter at the maximum state income or franchise tax rate applicable to the member under section 422.5, 422.5A, 422.33, or 422.63 on the nonresident members’ distributive shares of the income from the pass-through entity.
   (2)  The tax rate applicable to a tiered pass-through entity shall be the maximum state income tax rate applicable under section 422.5 or 422.5A, as applicable.
    Sec. 32.  Section 422.16C, subsection 4, paragraph a, as amended by this Act, is amended to read as follows:
   a.  A taxpayer making an election under this section shall be subject to tax in an amount equal to the maximum applicable rate under section 422.5 or 422.5A, as applicable, imposed against the taxable income of the taxpayer for the taxable year properly determined under this chapter and allocated and apportioned to the state under the rules adopted by the department. The tax shall be due with the taxpayer’s return required under this chapter.
    Sec. 33.  Section 422.25A, subsection 5, paragraph c, subparagraphs (3), (4), and (5), as amended by this Act, are amended to read as follows:
   (3)  Determine the total distributive share of all final federal partnership adjustments and positive reallocation adjustments as modified by this title that are reported to nonresident individual partners and nonresident fiduciary partners and allocate and apportion such adjustments as provided in section 422.33 at the partnership or tiered partner level, and multiply the resulting amount by the maximum highest individual income tax rate pursuant to section 422.5 or 422.5A, as applicable, for the reviewed year.
   (4)  For the total distributive share of all final federal partnership adjustments and positive reallocation adjustments as modified by this title that are reported to tiered partners:
   (a)  Determine the amount of such adjustments which are of a type that would be subject to sourcing to Iowa under section 422.8, subsection 2, paragraph “a”, as a nonresident, and then determine the portion of this amount that would be sourced to Iowa under those provisions as if the tiered partner were a nonresident.
   (b)  Determine the amount of such adjustments which are of a type that would not be subject to sourcing to Iowa under section 422.8, subsection 2, paragraph “a”, as a nonresident. 
   (c)  Determine the portion of the amount in subparagraph division (b) that can be established, as prescribed by the department by rule, to be properly allocable to indirect partners that are nonresident partners or other partners not subject to tax on the adjustments.
   (d)  Multiply the total of the amounts determined in subparagraph divisions (a) and (b), reduced by any amount determined in subparagraph division (c), by the highest individual income tax rate pursuant to section 422.5 or 422.5A, as applicable, for the reviewed year. 
   (5)  For the total distributive share of all final federal partnership adjustments and positive reallocation adjustments as modified by this title that are reported to resident individual partners and resident fiduciary partners, multiply that amount by the highest individual income tax rate pursuant to section 422.5 or 422.5A, as applicable, for the reviewed year.
    Sec. 34.  EFFECTIVE DATE.  This division of this Act takes effect January 1, 2026.
    Sec. 35.  APPLICABILITY.  This division of this Act applies to tax years beginning on or after January 1, 2026.
EXPLANATION
The inclusion of this explanation does not constitute agreement with
the explanation’s substance by the members of the general assembly.
   This bill relates to state taxation by modifying future individual income tax rates, creating processes for reducing individual income tax rates to zero, and reducing future contingent corporate income tax rates.
   DIVISION I —— CREATION OF TAXPAYER RELIEF TRUST FUND, INCOME TAX ELIMINATION FUND, AND BOARD. The bill creates the taxpayer relief trust fund (trust fund) and the income tax elimination fund (ITEF) for the purpose of reducing future individual income tax rates to zero. Under the bill, moneys are transferred through both funds before being used to fund the reduction of individual income tax rates.
   TRANSFERS FROM TAXPAYER RELIEF FUND. On July 1, 2024, the bill transfers $100 million from the taxpayer relief fund (TRF) to the ITEF.
   On January 1, 2025, the bill transfers $2.6 billion from the TRF to the trust fund. For FY 2027, and each fiscal year thereafter, the bill transfers from TRF to the trust fund, an amount equal to 25 percent of moneys transferred into the TRF each fiscal year.
   TRUST FUND. The trust fund is created beginning January 1, 2025, separate and apart from all other public moneys or funds of this state and the balance in the trust fund shall not be considered part of the balance of the general fund of the state. 
   The trust fund shall consist of all moneys collected by or appropriated or transferred to the trust fund including all interest, dividends, and rents, and shall also include all securities or investment income and other assets acquired by the use of the moneys in the trust fund and any other moneys that have been transferred or paid into the fund.
   The trust fund shall be administered by the Iowa public employees’ retirement system (IPERS).
   Beginning July 1, 2028, and each July 1 thereafter, the bill transfers 5 percent of the remaining balance of the trust fund at the close of the preceding fiscal year into the ITEF.
   After the individual income tax rate is adjusted to zero, the bill requires any moneys remaining in the trust fund to be transferred to the general fund of the state in the fiscal year the rate is adjusted to zero. 
   ITEF. The bill establishes the ITEF on July 1, 2024. The ITEF shall consist of all moneys transferred to the fund from the trust fund or appropriated to or otherwise collected by ITEF for the purpose of reducing the individual income tax rate to zero.
   The ITEF shall also be administered by IPERS. The moneys in the ITEF are deposited into the general fund of the state when individual income tax rates are adjusted pursuant to the procedures in new Code section 422.5B in the bill.
   After the rate is adjusted to zero, the bill requires any moneys remaining in the ITEF to be transferred to the general fund of the state in the fiscal year the rates are adjusted to zero.
   EXPENSES. The investment management and administrative expenses for the trust fund and fund shall be charged against the investment income of the fund. The bill limits the total investment management and administrative expenses of the trust fund and ITEF to $2 million in the aggregate per year.
   BOARD. After July 1, 2024, the bill creates a board to establish policy and to review implementation of the policy, in matters relating to the investment of the trust fund and the ITEF. The bill establishes the board as trustee of both funds.
   The bill allows the board to review and approve, prior to the execution of a contract with the system, the hiring of each investment manager and investment consultant outside of state government.
   The bill allows the board to review and approve the selection of any bank used by IPERS for each fund. 
   The bill requires the board to report to the fiscal committee of the legislative council.
   The board shall consist of 11 members, including 7 voting members and 4 nonvoting members.
   The voting members shall be as follows: four public members, appointed by the governor who each have substantial experience in institutional investment, institutional finance, or business management; two public members, appointed by the governor who are citizens of the state; and the director of the department of management.
   The nonvoting members of the board shall be two state representatives, one appointed by the speaker of the house of representatives and one by the minority leader of the house, and two state senators, one appointed by the majority leader of the senate and one by the minority leader of the senate.
   IPERS. The bill requires IPERS and the board to develop separate investment policies for each fund. IPERS and the board have broader authority to establish the investment policy for the trust fund than the investment policy for ITEF. The investment policy for the ITEF shall be similar to the Iowa public employees’ retirement system in Code chapter 97B. In developing the investment policy for either fund, the bill requires IPERS and the board to exercise judgment and care that requires prudence, discretion, probable income, and probable safety, as if investing personal funds. The board is required to give appropriate consideration to investments that are reasonably designed to further the purposes of each fund, taking into consideration the risk of loss and the opportunity for gain or income associated with the investment or investment policy.
   The bill allows each fund to acquire and retain every kind of property and every kind of investment which persons of prudence, discretion, and intelligence acquire or retain for a personal account.
   The bill specifies if there is loss to either fund, IPERS, the employees of IPERS, the members of the board severally, and the board are not personally liable, and the loss shall be charged against the trust fund or fund, as applicable, unless the conduct involves malicious or wanton misconduct.
   IPERS, in accordance with the investment policy established by the board, is authorized under the bill to sell any securities or other property in the trust fund and reinvest the proceeds when such action may be deemed advisable by IPERS for the protection of the fund or the preservation of the value of the investment.
   The bill allows IPERS, subject to board approval, to execute contracts and agreements with investment advisors and consultants in the administration of investments of moneys in either fund.
   ADJUSTING INDIVIDUAL INCOME TAX RATE. By November 1, 2028, and by November 1 each year thereafter, the department of management shall determine the amount of moneys available in the ITEF, and the net individual income tax receipts at the close of the preceding fiscal year. The amount available in the ITEF and the net tax receipts shall be provided to the department of revenue for the calculation to determine if the individual income tax rates may be adjusted. The bill specifies the department of revenue shall adjust and apply a new individual income tax rate in such a way that the rate would have generated an amount equal to the net receipts generated from the rate in the preceding fiscal year less the amount transferred from the ITEF.
   The bill prohibits the rate from being adjusted unless the amount of net sales and use tax revenue collected by the state during the most recent October 1 through September 30 calculation period is greater than 103 percent of the net sales and use tax revenue collected during the preceding calculation period covering the same months.
   The bill prohibits the rate from being adjusted unless the rate is able to be adjusted at least one-tenth of 1 percent. The rate, when adjusted, shall be rounded down to the nearest one-tenth of 1 percent.
   The bill prohibits the rate from being adjusted unless at least 150 percent of the amount to be transferred to the general fund of the state is available in the ITEF. 
   The bill requires the moneys in the ITEF be transferred to the general fund of the state in the fiscal year the rate is adjusted. The bill specifies the transfer from the ITEF to the general fund of the state shall not be considered “new revenue” for purposes of the general fund expenditure limitation in Code section 8.54.
   If a tax rate is adjusted, the bill requires the director of revenue to cause an advisory notice containing the new individual income tax rate to be published in the Iowa administrative bulletin and on the internet site of the department of revenue. The calculation and publication of the adjusted tax rate by the director of revenue is exempt from Code chapter 17A, and shall be submitted for publication by the first December 31 following the determination date to adjust the tax rates.
   DIVISION II —— INDIVIDUAL INCOME TAX RATES. The bill changes some of the individual income tax brackets and individual income tax rates for the tax year beginning January 1, 2024, but before January 1, 2025, and for the tax year beginning January 1, 2025, but before January 1, 2026. For the tax year beginning January 1, 2026, but before January 1, 2027, the bill lowers the future flat individual income tax rate from 3.90 percent to 3.775 percent. For tax years beginning on or after January 1, 2027, the bill lowers the flat individual income tax rate from 3.775 percent to 3.65 percent. The flat individual income tax rate of 3.65 percent is the rate that will be subject to reduction by the processes established in the bill.
   DIVISION III —— FUTURE CONTINGENT CORPORATE INCOME TAX RATE.  Under current law, a process exists by which corporate income tax rates may be lowered if net corporate income tax receipts for the preceding fiscal year exceed $700 million. Current law prohibits the corporate rate from being adjusted below 5.5 percent. The bill strikes the 5.5 percent corporate tax rate minimum, and provides that the corporate tax rate minimum shall not be adjusted below 4.90 percent.
   DIVISION IV —— FUTURE CODE EDITING OF INTERNAL REFERENCES.  The bill eliminates internal references to individual income tax rates in Code section 422.5A due to moving the individual income tax rate to Code section 422.5. The bill also eliminates references to “highest”, “maximum”, and “top” rate because the individual income tax rate becomes a flat rate commencing with tax years beginning on or after January 1, 2026.