Senate File 95 - Introduced SENATE FILE 95 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 date and applicability 7 provisions. 8 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 9 TLSB 1628XS (3) 86 tm/rj

S.F. 95 Section 1. Section 8.54, subsection 1, Code 2015, 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 2015, 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 1628XS (3) 86 tm/rj 1/ 10

S.F. 95 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 2015, 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 ninety-nine the lesser of the following amounts: 12 a. Ninety-nine percent of the adjusted revenue estimate for 13 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 2015, is amended by 19 striking the subsection. 20 Sec. 5. Section 8.55, subsection 2, Code 2015, 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 b. The remainder of the excess, not to exceed one percent 33 of the adjusted revenue estimate, shall be transferred to the 34 secondary road fund. 35 -2- LSB 1628XS (3) 86 tm/rj 2/ 10

S.F. 95 c. The remainder of the excess, not to exceed the first 1 sixty million dollars of the difference between the actual net 2 revenue for the general fund of the state for the fiscal year 3 and the adjusted revenue estimate for the fiscal year , shall be 4 transferred to the taxpayers trust fund. 5 b. d. The remainder of the excess, if any, shall be 6 transferred to the general fund of the state Iowa personal 7 income tax rate reduction fund created in section 8.57G . 8 Sec. 6. NEW SECTION . 8.57G Iowa personal income tax rate 9 reduction fund. 10 1. An Iowa personal income tax rate reduction fund is 11 created. The fund shall be separate from the general fund of 12 the state and the balance in the fund shall not be considered 13 part of the balance of the general fund of the state. The 14 moneys credited to the fund are not subject to section 8.33 and 15 shall not be transferred, used, obligated, appropriated, or 16 otherwise encumbered except as provided in this section. 17 2. a. Moneys in the Iowa personal income tax rate reduction 18 fund shall only be used pursuant to appropriations or transfers 19 made by the general assembly for tax relief. 20 b. No later than June 30 in each fiscal year the entire 21 balance of the Iowa personal income tax rate reduction fund, if 22 any, is transferred to the general fund of the state. 23 c. The moneys transferred to the general fund of the state 24 in accordance with paragraph “b” shall not be considered new 25 revenue for purposes of the state general fund expenditure 26 limitation under section 8.54 but instead shall be considered 27 as replacing a like amount included in the expenditure 28 limitation for the fiscal year in which the transfer is made. 29 3. a. Moneys in the Iowa personal income tax rate reduction 30 fund may be used for cash flow purposes during a fiscal year 31 provided that any moneys so allocated are returned to the fund 32 by the end of that fiscal year. 33 b. Except as provided in section 8.58, the Iowa personal 34 income tax rate reduction fund shall be considered a special 35 -3- LSB 1628XS (3) 86 tm/rj 3/ 10

S.F. 95 account for the purposes of section 8.53 in determining the 1 cash position of the general fund of the state for the payment 2 of state obligations. 3 4. Notwithstanding section 12C.7, subsection 2, interest or 4 earnings on moneys deposited in the Iowa personal income tax 5 rate reduction fund shall be credited to the fund. 6 Sec. 7. NEW SECTION . 8.57H Safety net fund. 7 1. A safety net fund is created. The fund shall be separate 8 from the general fund of the state and the balance in the fund 9 shall not be considered part of the balance of the general fund 10 of the state. The moneys credited to the fund are not subject 11 to section 8.33 and shall not be transferred, used, obligated, 12 appropriated, or otherwise encumbered except as provided in 13 this section. 14 2. Moneys in the safety net fund shall only be used pursuant 15 to appropriations or transfers made by the general assembly 16 to augment appropriations made for important education, 17 employment, health, human services, and other programs to aid 18 individuals and families with low income. 19 3. a. Moneys in the safety net fund may be used for cash 20 flow purposes during a fiscal year provided that any moneys so 21 allocated are returned to the fund by the end of that fiscal 22 year. 23 b. Except as provided in section 8.58, the safety net fund 24 shall be considered a special account for the purposes of 25 section 8.53 in determining the cash position of the general 26 fund of the state for the payment of state obligations. 27 4. Notwithstanding section 12C.7, subsection 2, interest 28 or earnings on moneys deposited in the safety net fund shall 29 be credited to the fund. 30 Sec. 8. Section 8.58, Code 2015, is amended to read as 31 follows: 32 8.58 Exemption from automatic application. 33 1. To the extent that moneys appropriated under section 34 8.57 do not result in moneys being credited to the general fund 35 -4- LSB 1628XS (3) 86 tm/rj 4/ 10

S.F. 95 under section 8.55, subsection 2 , moneys Moneys appropriated 1 under section 8.57 and moneys contained in the cash reserve 2 fund, rebuild Iowa infrastructure fund, environment first 3 fund, Iowa economic emergency fund, taxpayers trust fund, 4 and state bond repayment fund , Iowa personal income tax rate 5 reduction fund, and safety net fund shall not be considered 6 in the application of any formula, index, or other statutory 7 triggering mechanism which would affect appropriations, 8 payments, or taxation rates, contrary provisions of the Code 9 notwithstanding. To the extent that moneys projected to be 10 transferred from the Iowa personal income tax rate reduction 11 fund to the general fund of the state pursuant to section 12 8.57G replace revenues reduced pursuant to section 422.5, 13 subsection 1, paragraph “k” , such moneys so transferred shall 14 not be considered by an arbitrator or in negotiations under 15 chapter 20 in the application of such mechanisms that affect 16 appropriations, payments, or taxation rates. 17 2. To the extent that moneys appropriated under section 18 8.57 do not result in moneys being credited to the general fund 19 under section 8.55, subsection 2 , moneys Moneys appropriated 20 under section 8.57 and moneys contained in the cash reserve 21 fund, rebuild Iowa infrastructure fund, environment first 22 fund, Iowa economic emergency fund, taxpayers trust fund, 23 and state bond repayment fund , Iowa personal income tax rate 24 reduction fund, and safety net fund shall not be considered 25 by an arbitrator or in negotiations under chapter 20 . To the 26 extent that moneys projected to be transferred from the Iowa 27 personal income tax rate reduction fund to the general fund of 28 the state pursuant to section 8.57G replace revenues reduced 29 pursuant to section 422.5, subsection 1, paragraph “k” , such 30 moneys so transferred shall not be considered by an arbitrator 31 or in negotiations under chapter 20 in the application of such 32 mechanisms that affect appropriations, payments, or taxation 33 rates. 34 Sec. 9. Section 422.5, subsection 1, Code 2015, is amended 35 -5- LSB 1628XS (3) 86 tm/rj 5/ 10

S.F. 95 by adding the following new paragraph: 1 NEW PARAGRAPH . k. For the tax year beginning January 2 1 immediately preceding July 1 of any fiscal year in which 3 a transfer is made from the Iowa personal income tax rate 4 reduction fund to the general fund of the state pursuant to 5 section 8.57G, subsection 2, paragraph “b” , each rate in 6 paragraphs “a” through “i” shall be reduced, and rounded to the 7 nearest one-hundredth of one percent, by the percentage that 8 the amount transferred during the fiscal year from the Iowa 9 personal income tax rate reduction fund to the general fund 10 of the state bears to the actual net revenue for the general 11 fund of the state for the fiscal year immediately preceding 12 the fiscal year in which such transfer was made from the Iowa 13 personal income tax rate reduction fund to the general fund of 14 the state. A tax rate reduction provided in this paragraph 15 only applies to the tax year which is the subject of the rate 16 reduction and shall not affect tax rates in any successive tax 17 year. The department shall draft the income tax form for any 18 tax year in which rates are reduced under this paragraph to 19 provide information to taxpayers necessary to calculate the tax 20 due. 21 Sec. 10. Section 422.5, subsection 2, paragraph a, Code 22 2015, is amended to read as follows: 23 a. There is imposed upon every resident and nonresident 24 of this state, including estates and trusts, the greater of 25 the tax determined in subsection 1 , paragraphs “a” through “j” 26 “k” , or the state alternative minimum tax equal to seventy-five 27 percent of the maximum state individual income tax rate for the 28 tax year, rounded to the nearest one-tenth of one percent, of 29 the state alternative minimum taxable income of the taxpayer as 30 computed under this subsection . 31 Sec. 11. Section 422.11B, Code 2015, is amended to read as 32 follows: 33 422.11B Minimum tax credit. 34 1. a. There is allowed as a credit against the tax 35 -6- LSB 1628XS (3) 86 tm/rj 6/ 10

S.F. 95 determined in section 422.5, subsection 1 , paragraphs “a” 1 through “j” “k” for a tax year an amount equal to the minimum 2 tax credit for that tax year. 3 b. The minimum tax credit for a tax year is the excess, 4 if any, of the net minimum tax imposed for all prior tax 5 years beginning on or after January 1, 1987, over the amount 6 allowable as a credit under this section for those prior tax 7 years. 8 2. a. The allowable credit under subsection 1 for a tax 9 year shall not exceed the excess, if any, of the tax determined 10 in section 422.5, subsection 1 , paragraphs “a” through “j” “k” 11 over the state alternative minimum tax as determined in section 12 422.5, subsection 2 . 13 b. The net minimum tax for a tax year is the excess, if any, 14 of the tax determined in section 422.5, subsection 2 , for the 15 tax year over the tax determined in section 422.5, subsection 16 1 , paragraphs “a” through “j” “k” for the tax year. 17 Sec. 12. Section 422.16, subsection 1, paragraph a, Code 18 2015, is amended to read as follows: 19 a. Every withholding agent and every employer as defined 20 in this chapter and further defined in the Internal Revenue 21 Code, with respect to income tax collected at source, making 22 payment of wages to a nonresident employee working in Iowa, 23 or to a resident employee, shall deduct and withhold from the 24 wages an amount which will approximate the employee’s annual 25 tax liability on a calendar year basis, calculated on the 26 basis of tables to be prepared by the department and schedules 27 or percentage rates, based on the wages, to be prescribed by 28 the department , and calculated without regard to the rate 29 reductions provided in section 422.5, subsection 1, paragraph 30 “k” . Every employee or other person shall declare to the 31 employer or withholding agent the number of the employee’s 32 or other person’s personal allowances to be used in applying 33 the tables and schedules or percentage rates. However, no 34 greater number of allowances may be declared by the employee 35 -7- LSB 1628XS (3) 86 tm/rj 7/ 10

S.F. 95 or other person than the number to which the employee or other 1 person is entitled except as allowed under sections 3402(m)(1) 2 and 3402(m)(3) of the Internal Revenue Code and as allowed 3 for the child and dependent care credit provided in section 4 422.12C . The claiming of allowances in excess of entitlement 5 is a serious misdemeanor. 6 Sec. 13. EFFECTIVE DATE. This Act takes effect July 1, 7 2016. 8 Sec. 14. APPLICABILITY. The following provisions of this 9 Act are first applicable to calculate the state general fund 10 expenditure limitation for the fiscal year beginning July 1, 11 2016: 12 1. The sections amending section 8.54. 13 2. The sections amending section 8.55. 14 EXPLANATION 15 The inclusion of this explanation does not constitute agreement with 16 the explanation’s substance by the members of the general assembly. 17 This bill relates to the state general fund expenditure 18 limitation by revising calculation requirements for the 19 limitation, creating an Iowa personal income tax rate reduction 20 fund, making transfers, and providing for related state 21 personal income tax rate reductions. 22 Code section 8.54, relating to the state general fund 23 expenditure limitation, is amended to provide an additional 24 method for calculating the limitation. Under current law, the 25 limitation is 99 percent of the adjusted revenue estimate for 26 the following fiscal year based on an estimate approved by the 27 revenue estimating conference in a meeting held by December 15. 28 The new calculation method in the bill is based on the growth 29 in the average wage and salary component of the quarterly 30 state personal income table for Iowa issued by the bureau of 31 economic analysis of the United States department of commerce. 32 Under the new method, the department of management and the 33 legislative services agency are directed to apply the component 34 issued for the quarters of a two-year period to jointly 35 -8- LSB 1628XS (3) 86 tm/rj 8/ 10

S.F. 95 calculate a wage and salary growth factor percentage. One-half 1 of this percentage is added to 100 percent and applied to the 2 amount of the state general fund expenditure limitation for the 3 prior fiscal year (fiscal year in progress). The lesser amount 4 identified by the two methods is required to be used as the 5 state general fund expenditure limitation in the budget process 6 for the following fiscal year. 7 Under current law, if a surplus is anticipated for the 8 general fund of the state at the close of a fiscal year, any 9 excess remaining, after the surplus is applied to bring state 10 reserve funds to their maximum balances, is transferred back 11 to the state general fund for the following fiscal year. The 12 original state general fund expenditure limitation for that 13 following fiscal year is required to be readjusted to reflect 14 the amount of excess anticipated to be transferred. The bill 15 repeals the current law requirements for the excess in Code 16 sections 8.54(5) and 8.55(2) and instead requires the excess 17 to be transferred in the following order: first to the safety 18 net fund created by the bill, up to the maximum balance for 19 the safety net fund which is established as 2 percent of the 20 adjusted revenue estimate for the fiscal year; next, to the 21 secondary road fund in an amount of up to 1 percent of the 22 adjusted revenue estimate for the fiscal year; next, to the 23 taxpayer trust fund, up to the maximum amount specified in 24 current law; and the entire remainder to the personal income 25 tax rate reduction fund created by the bill. 26 New Code section 8.57G creates an Iowa personal income tax 27 rate reduction fund separate from the general fund. Moneys 28 in the fund can only be used pursuant to appropriations or 29 transfers made by the general assembly for tax relief, and 30 pursuant to law for temporary cash flow purposes. 31 New Code section 8.57H creates a safety net fund separate 32 from the general fund. Moneys in the fund can only be used 33 pursuant to appropriations or transfers made by the general 34 assembly to augment appropriations made for important 35 -9- LSB 1628XS (3) 86 tm/rj 9/ 10

S.F. 95 education, employment, health, human services, and other 1 programs to aid individuals and families with low income, and 2 pursuant to law for temporary cash flow purposes. 3 Moneys in the new funds are treated similarly to other 4 reserve funds under Code section 8.58 and exempted from 5 automatic application in triggering mechanisms which affect 6 appropriations, payments, or taxation rates and cannot be 7 considered by an arbitrator or in collective bargaining 8 negotiations under Code chapter 20. 9 Moneys transferred to the Iowa personal income tax rate 10 reduction fund are required to be transferred to the general 11 fund of the state by the end of the same fiscal year and treated 12 as a replacement of revenue resulting from the individual 13 income tax rate reduction provided for in the bill. 14 For tax years beginning January 1 immediately preceding July 15 1 of a fiscal year in which a transfer is made to the Iowa 16 personal income tax rate reduction fund, the rates for each of 17 the nine tax brackets of the individual income tax are required 18 to be reduced by the percentage that the amount transferred 19 to the fund bears to the state’s actual net revenue for the 20 preceding fiscal year. Tax rate reductions only apply for one 21 tax year and do not affect tax rates in any successive tax 22 year. Withholding agents and employers are prohibited from 23 factoring in such an individual income tax rate reduction in 24 their calculation of appropriate employee withholding amounts 25 during a tax year. Under the bill, the tax year beginning 26 January 1, 2016, is the first tax year to which the individual 27 income tax rate reduction may apply. 28 The bill takes effect July 1, 2016. However, the provisions 29 affecting calculation of the state general fund expenditure 30 limitation are first applicable for the budget process for the 31 fiscal year beginning July 1, 2016 (FY 2016-2017). 32 -10- LSB 1628XS (3) 86 tm/rj 10/ 10