Senate File 2208 - Introduced SENATE FILE 2208 BY CHAPMAN and ANDERSON A BILL FOR An Act relating to state financing involving the state 1 general fund expenditure limitation by revising calculation 2 requirements for the limitation, increasing reserve fund 3 balances, creating a safety net fund, creating an Iowa 4 personal income tax rate reduction fund, making transfers, 5 and providing for related state personal income tax rate 6 reductions, and including effective and applicability dates. 7 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 8 TLSB 5367XS (5) 86 tm/rj

S.F. 2208 Section 1. Section 8.54, subsection 1, Code 2016, is amended 1 by adding the following new paragraphs: 2 NEW PARAGRAPH . 0b. “Iowa wage and salary component” means 3 the wage and salary component of the quarterly state personal 4 income table for Iowa issued by the bureau of economic analysis 5 of the United States department of commerce. For the purposes 6 of this paragraph and paragraph “c” , “quarter” means the 7 calendar year quarter identified in the table issued by the 8 bureau. 9 NEW PARAGRAPH . c. “Wage and salary growth factor” means 10 one-half of the percentage increase, if any, in the average 11 of the second quarter Iowa wage and salary component issued 12 immediately prior to the meeting of the revenue estimating 13 conference held by December 15 in accordance with section 14 8.22A, subsection 3, and the Iowa wage and salary components 15 for the three quarters immediately preceding such second 16 quarter component, as compared to the average of the four 17 quarters of the Iowa wage and salary component immediately 18 preceding the oldest quarter used to calculate the first 19 average. 20 Sec. 2. Section 8.54, subsection 2, Code 2016, is amended 21 to read as follows: 22 2. a. There is created a state general fund expenditure 23 limitation for each fiscal year calculated as provided in 24 this section . An expenditure limitation shall be used for 25 the portion of the budget process commencing on the date the 26 revenue estimating conference agrees to a revenue estimate for 27 the following fiscal year in accordance with section 8.22A, 28 subsection 3 , and ending with the governor’s final approval 29 or disapproval of the appropriations bills applicable to that 30 fiscal year that were passed prior to July 1 of that fiscal 31 year in a regular or extraordinary legislative session. 32 b. A wage and salary growth factor for the following 33 fiscal year shall be calculated jointly by the department of 34 management and the legislative services agency for use in the 35 -1- LSB 5367XS (5) 86 tm/rj 1/ 10

S.F. 2208 budget process for the following fiscal year in accordance with 1 this section. The wage and salary growth factor calculation 2 for the following fiscal year shall be issued concurrently 3 with the meeting of the revenue estimating conference held by 4 December 15 in which the estimates used to develop the adjusted 5 revenue estimate for the following fiscal year are agreed to 6 by the conference. 7 Sec. 3. Section 8.54, subsection 3, Code 2016, is amended 8 to read as follows: 9 3. Except as otherwise provided in this section , the state 10 general fund expenditure limitation for a fiscal year shall be 11 the lesser of the following amounts: 12 a. ninety-nine Ninety-nine percent of the adjusted revenue 13 estimate for the fiscal year . 14 b. The percentage derived from adding to one hundred percent 15 the wage and salary growth factor calculated for the fiscal 16 year times the final state general fund expenditure limitation 17 for the prior fiscal year. 18 Sec. 4. Section 8.54, subsection 5, Code 2016, is amended by 19 striking the subsection. 20 Sec. 5. Section 8.55, subsection 2, Code 2016, is amended 21 to read as follows: 22 2. The maximum balance of the fund is the amount equal to 23 two and one-half percent of the adjusted revenue estimate for 24 the fiscal year. If the amount of moneys in the Iowa economic 25 emergency fund is equal to the maximum balance, moneys in 26 excess of this amount shall be distributed as follows in the 27 following order : 28 a. The initial excess, not to exceed the amount necessary 29 for the safety net fund to reach its maximum balance of two 30 percent of the adjusted revenue estimate for the fiscal year, 31 shall be transferred to the safety net fund. 32 a. b. The remainder of the excess, not to exceed the first 33 sixty million dollars of the difference between the actual net 34 revenue for the general fund of the state for the fiscal year 35 -2- LSB 5367XS (5) 86 tm/rj 2/ 10

S.F. 2208 and the adjusted revenue estimate for the fiscal year , shall be 1 transferred to the taxpayers trust fund. 2 b. c. The remainder of the excess, if any, shall be 3 transferred to the general fund of the state Iowa personal 4 income tax rate reduction fund created in section 8.57G . 5 Sec. 6. NEW SECTION . 8.57G Iowa personal income tax rate 6 reduction fund. 7 1. An Iowa personal income tax rate reduction fund is 8 created. The fund shall be separate from the general fund of 9 the state and the balance in the fund shall not be considered 10 part of the balance of the general fund of the state. The 11 moneys credited to the fund are not subject to section 8.33 and 12 shall not be transferred, used, obligated, appropriated, or 13 otherwise encumbered except as provided in this section. 14 2. a. Moneys in the Iowa personal income tax rate reduction 15 fund shall only be used pursuant to appropriations or transfers 16 made by the general assembly for tax relief. 17 b. No later than June 30 in each fiscal year the entire 18 balance of the Iowa personal income tax rate reduction fund, if 19 any, is transferred to the general fund of the state. 20 c. The moneys transferred to the general fund of the state 21 in accordance with paragraph “b” shall not be considered new 22 revenue for purposes of the state general fund expenditure 23 limitation under section 8.54 but instead shall be considered 24 as replacing a like amount included in the expenditure 25 limitation for the fiscal year in which the transfer is made. 26 3. a. Moneys in the Iowa personal income tax rate reduction 27 fund may be used for cash flow purposes during a fiscal year 28 provided that any moneys so allocated are returned to the fund 29 by the end of that fiscal year. 30 b. Except as provided in section 8.58, the Iowa personal 31 income tax rate reduction fund shall be considered a special 32 account for the purposes of section 8.53 in determining the 33 cash position of the general fund of the state for the payment 34 of state obligations. 35 -3- LSB 5367XS (5) 86 tm/rj 3/ 10

S.F. 2208 4. Notwithstanding section 12C.7, subsection 2, interest or 1 earnings on moneys deposited in the Iowa personal income tax 2 rate reduction fund shall be credited to the fund. 3 Sec. 7. NEW SECTION . 8.57H Safety net fund. 4 1. A safety net fund is created. The fund shall be separate 5 from the general fund of the state and the balance in the fund 6 shall not be considered part of the balance of the general fund 7 of the state. The moneys credited to the fund are not subject 8 to section 8.33 and shall not be transferred, used, obligated, 9 appropriated, or otherwise encumbered except as provided in 10 this section. 11 2. Moneys in the safety net fund shall only be used pursuant 12 to appropriations or transfers made by the general assembly 13 to augment appropriations made for important education, 14 employment, health, human services, and other programs to aid 15 individuals and families with low income. 16 3. a. Moneys in the safety net fund may be used for cash 17 flow purposes during a fiscal year provided that any moneys so 18 allocated are returned to the fund by the end of that fiscal 19 year. 20 b. Except as provided in section 8.58, the safety net fund 21 shall be considered a special account for the purposes of 22 section 8.53 in determining the cash position of the general 23 fund of the state for the payment of state obligations. 24 4. Notwithstanding section 12C.7, subsection 2, interest 25 or earnings on moneys deposited in the safety net fund shall 26 be credited to the fund. 27 Sec. 8. Section 8.58, Code 2016, is amended to read as 28 follows: 29 8.58 Exemption from automatic application. 30 1. To the extent that moneys appropriated under section 31 8.57 do not result in moneys being credited to the general fund 32 under section 8.55, subsection 2 , moneys Moneys appropriated 33 under section 8.57 and moneys contained in the cash reserve 34 fund, rebuild Iowa infrastructure fund, environment first 35 -4- LSB 5367XS (5) 86 tm/rj 4/ 10

S.F. 2208 fund, Iowa economic emergency fund, taxpayers trust fund, 1 and state bond repayment fund , Iowa personal income tax rate 2 reduction fund, and safety net fund shall not be considered 3 in the application of any formula, index, or other statutory 4 triggering mechanism which would affect appropriations, 5 payments, or taxation rates, contrary provisions of the Code 6 notwithstanding. To the extent that moneys projected to be 7 transferred from the Iowa personal income tax rate reduction 8 fund to the general fund of the state pursuant to section 8.57G 9 replace revenues reduced pursuant to section 422.5, subsection 10 1, paragraph “k” , such moneys reduction shall not be considered 11 by such arbitrator or in such negotiations in the application 12 of such mechanisms that affect appropriations, payments, or 13 taxation rates. 14 2. To the extent that moneys appropriated under section 15 8.57 do not result in moneys being credited to the general fund 16 under section 8.55, subsection 2 , moneys Moneys appropriated 17 under section 8.57 and moneys contained in the cash reserve 18 fund, rebuild Iowa infrastructure fund, environment first 19 fund, Iowa economic emergency fund, taxpayers trust fund, 20 and state bond repayment fund , Iowa personal income tax rate 21 reduction fund, and safety net fund shall not be considered 22 by an arbitrator or in negotiations under chapter 20 . To the 23 extent that moneys projected to be transferred from the Iowa 24 personal income tax rate reduction fund to the general fund of 25 the state pursuant to section 8.57G replace revenues reduced 26 pursuant to section 422.5, subsection 1, paragraph “k” , such 27 moneys reduction shall not be considered by such arbitrator or 28 in such negotiations in the application of such mechanisms that 29 affect appropriations, payments, or taxation rates. 30 Sec. 9. Section 422.5, subsection 1, Code 2014, is amended 31 by adding the following new paragraph: 32 NEW PARAGRAPH . k. For the tax year beginning January 1 33 immediately preceding July 1 of any fiscal year in which a 34 transfer is made to the Iowa personal income tax rate reduction 35 -5- LSB 5367XS (5) 86 tm/rj 5/ 10

S.F. 2208 fund pursuant to section 8.57G, subsection 2, paragraph “b” , 1 each rate in paragraphs “a” through “i” shall be reduced, and 2 rounded to the nearest one-hundredth of one percent, by the 3 percentage that the amount transferred during the fiscal year 4 to the Iowa personal income tax rate reduction fund bears 5 to the actual net revenue for the general fund of the state 6 for the fiscal year immediately preceding the fiscal year in 7 which such transfer was made to the Iowa personal income tax 8 rate reduction fund. A tax rate reduction provided in this 9 paragraph only applies to the tax year which is the subject 10 of the rate reduction and shall not effect tax rates in any 11 successive tax year. The department shall draft the income tax 12 form for any tax year in which rates are reduced under this 13 paragraph to provide information to taxpayers necessary to 14 calculate the tax due. 15 Sec. 10. Section 422.5, subsection 2, paragraph a, Code 16 2016, is amended to read as follows: 17 a. There is imposed upon every resident and nonresident 18 of this state, including estates and trusts, the greater of 19 the tax determined in subsection 1 , paragraphs “a” through “j” 20 “k” , or the state alternative minimum tax equal to seventy-five 21 percent of the maximum state individual income tax rate for the 22 tax year, rounded to the nearest one-tenth of one percent, of 23 the state alternative minimum taxable income of the taxpayer as 24 computed under this subsection . 25 Sec. 11. Section 422.11B, Code 2016, is amended to read as 26 follows: 27 422.11B Minimum tax credit. 28 1. a. There is allowed as a credit against the tax 29 determined in section 422.5, subsection 1 , paragraphs “a” 30 through “j” “k” for a tax year an amount equal to the minimum 31 tax credit for that tax year. 32 b. The minimum tax credit for a tax year is the excess, 33 if any, of the net minimum tax imposed for all prior tax 34 years beginning on or after January 1, 1987, over the amount 35 -6- LSB 5367XS (5) 86 tm/rj 6/ 10

S.F. 2208 allowable as a credit under this section for those prior tax 1 years. 2 2. a. The allowable credit under subsection 1 for a tax 3 year shall not exceed the excess, if any, of the tax determined 4 in section 422.5, subsection 1 , paragraphs “a” through “j” “k” 5 over the state alternative minimum tax as determined in section 6 422.5, subsection 2 . 7 b. The net minimum tax for a tax year is the excess, if any, 8 of the tax determined in section 422.5, subsection 2 , for the 9 tax year over the tax determined in section 422.5, subsection 10 1 , paragraphs “a” through “j” “k” for the tax year. 11 Sec. 12. Section 422.16, subsection 1, paragraph a, Code 12 2016, is amended to read as follows: 13 a. Every withholding agent and every employer as defined 14 in this chapter and further defined in the Internal Revenue 15 Code, with respect to income tax collected at source, making 16 payment of wages to a nonresident employee working in Iowa, 17 or to a resident employee, shall deduct and withhold from the 18 wages an amount which will approximate the employee’s annual 19 tax liability on a calendar year basis, calculated on the 20 basis of tables to be prepared by the department and schedules 21 or percentage rates, based on the wages, to be prescribed by 22 the department , and calculated without regard to the rate 23 reductions provided in section 422.5, subsection 1, paragraph 24 “k” . Every employee or other person shall declare to the 25 employer or withholding agent the number of the employee’s 26 or other person’s personal allowances to be used in applying 27 the tables and schedules or percentage rates. However, no 28 greater number of allowances may be declared by the employee 29 or other person than the number to which the employee or other 30 person is entitled except as allowed under sections 3402(m)(1) 31 and 3402(m)(3) of the Internal Revenue Code and as allowed 32 for the child and dependent care credit provided in section 33 422.12C . The claiming of allowances in excess of entitlement is 34 a serious misdemeanor. 35 -7- LSB 5367XS (5) 86 tm/rj 7/ 10

S.F. 2208 Sec. 13. EFFECTIVE DATE. This Act takes effect July 1, 1 2017. 2 Sec. 14. APPLICABILITY. The following provisions of this 3 Act are first applicable to calculate the state general fund 4 expenditure limitation for the fiscal year beginning July 1, 5 2017: 6 1. The sections amending section 8.54. 7 2. The sections amending section 8.55. 8 EXPLANATION 9 The inclusion of this explanation does not constitute agreement with 10 the explanation’s substance by the members of the general assembly. 11 This bill relates to the state general fund expenditure 12 limitation by revising calculation requirements for the 13 limitation, creating a safety net fund, creating an Iowa 14 personal income tax rate reduction fund, making transfers, 15 and providing for related state personal income tax rate 16 reductions. 17 Code section 8.54, relating to the state general fund 18 expenditure limitation, is amended to provide an additional 19 method for calculating the limitation. Under current law, 20 the limitation is 99 percent of the adjusted revenue estimate 21 for the following fiscal year based on an estimate approved 22 by the revenue estimating conference in a meeting held by 23 December 15. The new calculation method in the bill is based 24 on the growth in the average wage and salary component of the 25 quarterly state personal income table for Iowa issued by the 26 bureau of economic analysis of the United States department of 27 commerce. Under the new method, the department of management 28 and the legislative services agency are directed to apply the 29 component issued for the quarters of a two-year period to 30 jointly calculate a wage and salary growth factor percentage. 31 One-half of this percentage amount, combined with 100 percent, 32 is applied to the amount of the state general fund expenditure 33 limitation for the prior fiscal year (fiscal year in progress). 34 The lesser amount identified by the two methods is required to 35 -8- LSB 5367XS (5) 86 tm/rj 8/ 10

S.F. 2208 be used as the state general fund expenditure limitation in the 1 budget process for the following fiscal year. 2 Under current law, if a surplus is anticipated for the 3 general fund of the state at the close of a fiscal year, any 4 excess remaining, after the surplus is applied to bring state 5 reserve funds to their maximum balances, is transferred back 6 to the state general fund for the following fiscal year. The 7 original state general fund expenditure limitation for that 8 following fiscal year is required to be readjusted to reflect 9 the amount of excess anticipated to be transferred. The bill 10 repeals the current law requirements for the excess in Code 11 sections 8.54(5) and 8.55(2) and instead requires the excess 12 to be transferred in the following order: first to the safety 13 net fund created by the bill, up to the maximum balance for 14 the safety net fund which is established as 2 percent of the 15 adjusted revenue estimate for the fiscal year; next, to the 16 taxpayer trust fund, up to the maximum amount specified in 17 current law; and the entire remainder to the personal income 18 tax rate reduction fund created by the bill. 19 New Code section 8.57G creates an Iowa personal income tax 20 reduction fund separate from the general fund. Moneys in the 21 fund can only be used pursuant to appropriations or transfers 22 made by the general assembly for tax relief and for temporary 23 cash flow purposes. 24 New Code section 8.57H creates a safety net fund separate 25 from the general fund. Moneys in the fund can only be used 26 pursuant to appropriations or transfers made by the general 27 assembly to augment appropriations made for important 28 education, employment, health, human services, and other 29 programs to aid individuals and families with low income. 30 Moneys in the new funds are treated similarly to other 31 reserve funds under Code section 8.58 and exempted from 32 automatic application in triggering mechanisms which affect 33 appropriations, payments, or taxation rates and cannot be 34 considered by an arbitrator or in collective bargaining 35 -9- LSB 5367XS (5) 86 tm/rj 9/ 10

S.F. 2208 negotiations under Code chapter 20. 1 Moneys transferred to the Iowa personal income tax rate 2 reduction fund are required to be transferred to the general 3 fund of the state by the end of the same fiscal year and treated 4 as a replacement of revenue resulting from the individual 5 income tax rate reduction provided for in the bill. 6 For tax years beginning January 1 immediately preceding July 7 1 of a fiscal year in which a transfer is made to the Iowa 8 personal income tax rate reduction fund, the rates for each of 9 the nine tax brackets of the individual income tax are required 10 to be reduced by the percentage that the amount transferred 11 to the fund bears to the state’s actual net revenue for the 12 preceding fiscal year. Tax rate reductions only apply for one 13 tax year and do not affect tax rates in any successive tax 14 year. Withholding agents and employers are prohibited from 15 factoring in such an individual income tax rate reduction in 16 their calculation of appropriate employee withholding amounts 17 during a tax year. Under the bill, the tax year beginning 18 January 1, 2018, is the first tax year to which the individual 19 income tax rate reduction may apply. 20 The bill takes effect July 1, 2017. However, the provisions 21 affecting calculation of the state general fund expenditure 22 limitation are first applicable for the budget process for the 23 fiscal year beginning July 1, 2017 (FY 2017-2018). 24 -10- LSB 5367XS (5) 86 tm/rj 10/ 10