House Study Bill 215 - Introduced HOUSE FILE _____ BY (PROPOSED COMMITTEE ON WAYS AND MEANS BILL BY CHAIRPERSON SANDS) A BILL FOR An Act relating to the individual income tax by providing 1 an alternative base income tax and related alternative 2 cumulative income surtax imposed at the election of the 3 taxpayer and including effective date and retroactive 4 applicability provisions. 5 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 6 TLSB 1400YC (5) 86 mm/sc

H.F. _____ DIVISION I 1 ALTERNATIVE BASE INCOME TAX AND 2 ALTERNATIVE CUMULATIVE INCOME SURTAX 3 Section 1. Section 298.14, Code 2015, is amended to read as 4 follows: 5 298.14 School district income surtaxes. 6 1. a. For each fiscal year, the cumulative total of the 7 percents of surtax approved by the board of directors of a 8 school district and collected by the department of revenue 9 under sections 257.21 , 257.29 , and 298.2 , and the enrichment 10 surtax under section 442.15 , Code 1989, and an income surtax 11 collected by a political subdivision under chapter 422D , shall 12 not exceed twenty percent. 13 b. Notwithstanding paragraph “a” , or any other provision 14 of law to the contrary, for a taxpayer who makes an election 15 under section 422.5A, subsection 2, and who is subject to an 16 income surtax as provided in section 257.21, 257.29, 298.2, 17 442.15, Code 1989, or chapter 422D, the appropriate governing 18 body shall impose, and the department of revenue shall collect, 19 an alternative cumulative income surtax from the taxpayer in an 20 amount equal to one hundred twenty-two percent of the amount 21 generated by each surtax imposed on the taxpayer by the school 22 district or political subdivision for the tax year in which the 23 election is made. 24 2. A school district income surtax fund is created in the 25 office of treasurer of state. Income surtaxes collected by 26 the department of revenue under sections 257.21 , 257.29 , and 27 298.2 and section 442.15 , Code 1989, shall be deposited in the 28 school district income surtax fund to the credit of each school 29 district. A separate accounting of each surtax, by school 30 district, shall be maintained. 31 3. The director of the department of administrative 32 services shall draw warrants in payment of the surtaxes 33 collected in each school district. Warrants shall be payable 34 in two installments to be paid on approximately the first day 35 -1- LSB 1400YC (5) 86 mm/sc 1/ 9

H.F. _____ of December and the first day of February following collection 1 of the taxes and shall be delivered to the respective school 2 districts. 3 Sec. 2. NEW SECTION . 422.5A Tax imposed —— alternative base 4 income tax. 5 1. For purposes of this section, “base income” means the 6 adjusted gross income before the net operating loss deduction 7 as properly computed for federal income tax purposes under the 8 Internal Revenue Code, with the following adjustments: 9 a. Subtract a standard deduction equal to six thousand two 10 hundred thirty-five dollars for a married person who files 11 separately or a single person or equal to twelve thousand four 12 hundred seventy dollars for a married couple who files a joint 13 return, a surviving spouse, or a head of household. 14 b. Subtract interest and dividends from federal securities. 15 c. Subtract, to the extent included, the amount of social 16 security benefits taxable under section 86 of the Internal 17 Revenue Code. 18 d. Subtract, to the extent included, the total amount of a 19 governmental or other pension or retirement pay, including but 20 not limited to defined benefit or defined contribution plans, 21 annuities, individual retirement accounts, plans maintained or 22 contributed to by an employer, or maintained or contributed 23 to by a self-employed person as an employer, and deferred 24 compensation plans or any earnings attributable to the deferred 25 compensation plans. 26 2. Notwithstanding any other provision of law, a resident 27 or nonresident may, in lieu of the taxes imposed under section 28 422.5, elect to be subject to state income tax as imposed and 29 computed pursuant to subsection 3. Such election must be made 30 not later than the due date for filing the return for a taxable 31 year, including extensions thereof, and under rules to be 32 prescribed by the director. 33 3. A tax is imposed upon every resident and nonresident 34 of the state making the election under subsection 2 which tax 35 -2- LSB 1400YC (5) 86 mm/sc 2/ 9

H.F. _____ shall be levied, collected, and paid annually in an amount 1 equal to the base income of the resident or nonresident times 2 five percent. 3 4. Notwithstanding any other provision of law to the 4 contrary, a resident or nonresident making the election 5 under subsection 2 shall not be allowed any nonrefundable or 6 refundable credit otherwise allowed under this division for the 7 tax year for which the election is made, except for the credits 8 for withheld tax and estimated tax paid under section 422.16. 9 5. A taxpayer making the election under subsection 2 shall 10 be subject to an alternative cumulative income surtax as 11 provided in section 298.14, if applicable. 12 6. a. The director shall determine for the 2016 calendar 13 year and each subsequent calendar year the annual and 14 cumulative standard deduction factors to be applied to tax 15 years beginning on or after January 1 of that calendar year. 16 The director shall compute the new dollar amounts of the 17 standard deductions specified in section 422.5A, subsection 18 1, paragraph “a” , by the latest cumulative standard deduction 19 factor and round off the result to the nearest ten dollars. 20 The annual and cumulative standard deduction factors determined 21 by the director under this subsection are not rules as defined 22 in section 17A.2, subsection 11. 23 b. For purposes of this subsection and notwithstanding 24 section 422.4, subsection 2, paragraph “b” , “cumulative standard 25 deduction factor” means the product of the annual standard 26 deduction factor for the 2016 calendar year and all annual 27 standard deduction factors for subsequent calendar years 28 as determined pursuant to this subsection. The cumulative 29 standard deduction factor applies to all tax years beginning 30 on or after January 1 of the calendar year for which the latest 31 annual standard deduction factor has been determined. 32 Sec. 3. Section 422.13, Code 2015, is amended by adding the 33 following new subsection: 34 NEW SUBSECTION . 1A. a. Notwithstanding subsection 1, 35 -3- LSB 1400YC (5) 86 mm/sc 3/ 9

H.F. _____ a resident or nonresident of this state who is at least 1 sixty-five years old on December 31 of the tax year and who 2 elects to be subject to the alternative base income tax in 3 subsection 422.5A, shall not be required to make and file a 4 return if the taxpayer’s base income does not exceed thirty-two 5 thousand dollars in the case of married persons filing jointly 6 or filing separately on a combined return, heads of household, 7 and surviving spouses or twenty-four thousand dollars in the 8 case of all other persons. For purposes of this subsection, 9 “base income” means the same as defined in section 422.5A, 10 subsection 1, except that it includes all amounts of pensions 11 or other retirement income received from any source which is 12 not taxable under section 422.5A, but does not include military 13 retirement pay described in section 422.7, subsections 31A and 14 31B. 15 b. A taxpayer who is at least sixty-five years old on 16 December 31 of the tax year and whose base income does not 17 exceed the applicable amounts in paragraph “a” and who does 18 not make and file a return pursuant to this section shall be 19 deemed to have made the election required in section 422.5A, 20 subsection 2. 21 Sec. 4. Section 422.13, subsection 2, Code 2015, is amended 22 to read as follows: 23 2. For purposes of determining the requirement for filing 24 a return under subsection 1 or 1A , the combined net income or 25 base income, as the case may be, of a husband and wife from 26 sources taxable under this division shall be considered. 27 DIVISION II 28 CONFORMING CHANGES 29 Sec. 5. Section 68A.102, subsection 21, Code 2015, is 30 amended to read as follows: 31 21. “State income tax liability” means either the state 32 individual income tax imposed under section 422.5 , less the 33 amounts of nonrefundable credits allowed under chapter 422, 34 division II , or the alternative base income tax imposed under 35 -4- LSB 1400YC (5) 86 mm/sc 4/ 9

H.F. _____ section 422.5A if applicable . 1 Sec. 6. Section 257.21, subsection 2, Code 2015, is amended 2 to read as follows: 3 2. The instructional support income surtax shall be imposed 4 on the state individual income tax for the calendar year during 5 which the school’s budget year begins, or for a taxpayer’s 6 fiscal year ending during the second half of that calendar year 7 and after the date the board adopts a resolution to participate 8 in the program or the first half of the succeeding calendar 9 year, and shall be imposed on all individuals residing in the 10 school district on the last day of the applicable tax year. As 11 used in this section , “state individual income tax” means either 12 the taxes computed under section 422.5 , less the amounts of 13 nonrefundable credits allowed under chapter 422, division II , 14 except for the Iowa taxpayers trust fund tax credit allowed 15 under section 422.11E , or the tax computed under section 422.5A 16 if applicable . 17 Sec. 7. Section 422.16, subsection 8, Code 2015, is amended 18 to read as follows: 19 8. An employer or withholding agent shall be liable for 20 the payment of the tax required to be deducted and withheld 21 or the amount actually deducted, whichever is greater, under 22 subsections 1 and 12 of this section ; and any amount deducted 23 and withheld as tax under subsections 1 and 12 of this section 24 during any calendar year upon the wages of any employee, 25 nonresident, or other person shall be allowed as a credit to 26 the employee, nonresident, or other person against the tax 27 imposed by section 422.5 , or section 422.5A if applicable , 28 irrespective of whether or not such tax has been, or will 29 be, paid over by the employer or withholding agent to the 30 department as provided by this chapter . 31 Sec. 8. Section 422.21, subsection 1, Code 2015, is amended 32 to read as follows: 33 1. Returns shall be in the form the director prescribes, 34 and shall be filed with the department on or before the last 35 -5- LSB 1400YC (5) 86 mm/sc 5/ 9

H.F. _____ day of the fourth month after the expiration of the tax year. 1 However, cooperative associations as defined in section 6072(d) 2 of the Internal Revenue Code shall file their returns on or 3 before the fifteenth day of the ninth month following the 4 close of the taxable year and nonprofit corporations subject 5 to the unrelated business income tax imposed by section 6 422.33, subsection 1A , shall file their returns on or before 7 the fifteenth day of the fifth month following the close of 8 the taxable year. If, under the Internal Revenue Code, a 9 corporation is required to file a return covering a tax period 10 of less than twelve months, the state return shall be for the 11 same period and is due forty-five days after the due date of 12 the federal tax return, excluding any extension of time to 13 file. In case of sickness, absence, or other disability, or 14 if good cause exists, the director may allow further time for 15 filing returns. The director shall cause to be prepared blank 16 forms for the returns and shall cause them to be distributed 17 throughout the state and to be furnished upon application, 18 but failure to receive or secure the form does not relieve 19 the taxpayer from the obligation of making a return that is 20 required. The department may as far as consistent with the 21 Code draft income tax forms to conform to the income tax 22 forms of the internal revenue department of the United States 23 government. Each return by a taxpayer upon whom a tax is 24 imposed by section 422.5 or 422.5A shall show the county of the 25 residence of the taxpayer. 26 Sec. 9. Section 422D.2, Code 2015, is amended to read as 27 follows: 28 422D.2 Local income surtax. 29 A county may impose by ordinance a local income surtax as 30 provided in section 422D.1 at the rate set by the board of 31 supervisors, of up to one percent, on the state individual 32 income tax of each individual residing in the county at the 33 end of the individual’s applicable tax year. However, the 34 cumulative total of the percents of income surtax imposed on 35 -6- LSB 1400YC (5) 86 mm/sc 6/ 9

H.F. _____ any taxpayer in the county shall not exceed twenty percent , 1 except as provided in section 298.14 . The reason for imposing 2 the surtax and the amount needed shall be set out in the 3 ordinance. The surtax rate shall be set to raise only the 4 amount needed. For purposes of this section , “state individual 5 income tax” means the tax computed under section 422.5 , less 6 the amounts of nonrefundable credits allowed under chapter 7 422, division II , except for the Iowa taxpayers trust fund tax 8 credit allowed under section 422.11E , or the tax computed under 9 section 422.5A if applicable . 10 DIVISION III 11 IMPLEMENTATION 12 Sec. 10. EFFECTIVE UPON ENACTMENT. This Act, being deemed 13 of immediate importance, takes effect upon enactment. 14 Sec. 11. RETROACTIVE APPLICABILITY. This Act applies 15 retroactively to January 1, 2015, for tax years beginning on 16 or after that date. 17 EXPLANATION 18 The inclusion of this explanation does not constitute agreement with 19 the explanation’s substance by the members of the general assembly. 20 This bill relates to the individual income tax by creating 21 an alternative base income tax imposed at the election of the 22 taxpayer. 23 Division I relates to the computation and imposition of an 24 alternative base income tax. 25 In lieu of the regular personal net income tax computed and 26 imposed under Code section 422.5, a resident or nonresident 27 individual may elect to be subject to an alternative base 28 income tax as provided in the division. An election must be 29 made not later than the due date for filing the return for 30 a taxable year, including extensions, and under rules to be 31 prescribed by the director. 32 The state income tax of a taxpayer making an election 33 shall be an amount of tax equal to the taxpayer’s base income 34 times 5 percent. “Base income” is defined as the taxpayer’s 35 -7- LSB 1400YC (5) 86 mm/sc 7/ 9

H.F. _____ adjusted gross income before the net operating loss deduction 1 as properly computed for federal income tax purposes, less a 2 standard deduction of $6,235 for a married person who files 3 separately or a single person or $12,470 for a married couple 4 filing a joint return, a surviving spouse, or a head of 5 household, less interest and dividends from federal securities, 6 and less social security benefits and retirement income. The 7 division indexes the standard deduction amounts for future 8 inflation. A taxpayer shall not be allowed any nonrefundable 9 or refundable tax credit for the tax year for which the 10 election is made, except the credits for withheld tax and 11 estimated tax paid under Code section 422.16. 12 Taxpayers who are 65 years of age or older who elect the 13 alternative base income tax are not required to file an 14 income tax return if base income does not exceed $32,000 for 15 a married person filing jointly or filing separately on a 16 combined return, a head of household, or a surviving spouse, 17 or $24,000 for all other persons. For purposes of calculating 18 base income for the filing threshold, taxpayers are required 19 to add back any social security benefits or retirement income 20 otherwise exempt under the bill except for military retirement 21 pay. Taxpayers who meet these requirements and who do not file 22 a tax return are deemed to have elected to be subject to the 23 alternative base income tax. 24 If a taxpayer making an election is also subject to a local 25 income surtax, that taxpayer is subject to a local income 26 surtax rate that is 22 percent higher than the rate otherwise 27 imposed by the school district or political subdivision. 28 Division II relates to miscellaneous conforming changes. 29 The division makes conforming changes to the definitions of 30 “state income tax liability” for purposes of the Iowa election 31 campaign fund income tax checkoff in Code chapter 68A, and 32 “state individual income tax” for purposes of the emergency 33 medical services income surtax in Code chapter 422D, the 34 instructional support income surtax in Code section 257.21, 35 -8- LSB 1400YC (5) 86 mm/sc 8/ 9

H.F. _____ and, by reference, the educational improvement income surtax 1 in Code section 257.29 and the physical plant and equipment 2 income surtax in Code section 298.2, to include income tax 3 computed and imposed under the alternative system in new Code 4 section 422.5A. The division also amends Code sections 422.16 5 and 422.21 to include references to new Code section 422.5A 6 in provisions of those Code sections that reference the tax 7 imposed under Code section 422.5. 8 Division III relates to implementation of the bill. 9 The division provides that the bill takes effect upon 10 enactment and applies retroactively to January 1, 2015, for tax 11 years beginning on or after that date. 12 -9- LSB 1400YC (5) 86 mm/sc 9/ 9