Senate File 294 - Introduced SENATE FILE 294 BY CHAPMAN 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, creating a safety net fund, 3 making transfers, and providing for related state personal 4 income tax rate reductions, and including effective date and 5 applicability provisions. 6 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 7 TLSB 1131XS (4) 88 ns/tm

S.F. 294 Section 1. Section 8.54, subsection 1, Code 2019, 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 state personal income 4 table for Iowa issued each quarter by the bureau of economic 5 analysis of the United States department of commerce. For 6 purposes of this paragraph and paragraph “c” , “quarter” means 7 the 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, subsections 2 and 3, Code 2019, are 21 amended 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 1131XS (4) 88 ns/tm 1/ 9

S.F. 294 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 3. Except as otherwise provided in this section , the state 8 general fund expenditure limitation for a fiscal year shall be 9 ninety-nine the lesser of the following amounts: 10 a. Ninety-nine percent of the adjusted revenue estimate for 11 the fiscal year . 12 b. The percentage derived from adding to one hundred percent 13 the wage and salary growth factor calculated for the fiscal 14 year multiplied by the final state general fund expenditure 15 limitation for the prior fiscal year. 16 Sec. 3. Section 8.54, subsection 5, Code 2019, is amended by 17 striking the subsection. 18 Sec. 4. Section 8.55, subsection 2, unnumbered paragraph 1, 19 Code 2019, is amended to read as follows: 20 The maximum balance of the fund is the amount equal to two 21 and one-half percent of the adjusted revenue estimate for the 22 fiscal year. If the amount of moneys in the Iowa economic 23 emergency fund is equal to the maximum balance, moneys in 24 excess of this amount shall be distributed as follows in the 25 following order : 26 Sec. 5. Section 8.55, subsection 2, Code 2019, is amended by 27 adding the following new paragraph: 28 NEW PARAGRAPH . 0a. The initial excess, not to exceed the 29 amount necessary for the safety net fund to reach its maximum 30 balance, shall be transferred to the safety net fund created 31 in section 8.57G. 32 Sec. 6. Section 8.55, subsection 2, paragraph a, Code 2018, 33 as amended by 2018 Iowa Acts, chapter 1161, section 55, is 34 amended to read as follows: 35 -2- LSB 1131XS (4) 88 ns/tm 2/ 9

S.F. 294 a. b. The Following a transfer pursuant to paragraph “0a” , 1 the remainder of the excess, if any, of the difference between 2 the actual net revenue for the general fund of the state for 3 the fiscal year and the adjusted revenue estimate for the 4 fiscal year shall be transferred to the taxpayers trust fund 5 created in section 8.57E . 6 Sec. 7. Section 8.55, subsection 2, paragraph b, Code 2019, 7 is amended by striking the paragraph. 8 Sec. 8. Section 8.57E, subsection 2, Code 2019, is amended 9 to read as follows: 10 2. a. Moneys in the taxpayer relief fund shall only be used 11 pursuant to appropriations or transfers made by the general 12 assembly for tax relief, including but not limited to increases 13 in the general retirement income exclusion under section 422.7, 14 subsection 31 , or reductions in income tax rates. 15 b. No later than June 30 in each fiscal year, the entire 16 balance of the taxpayer relief fund, if any, is transferred to 17 the general fund of the state. 18 c. The moneys transferred to the general fund of the state 19 in accordance with paragraph “b” shall not be considered new 20 revenue for purposes of the state general fund expenditure 21 limitation under section 8.54, but instead shall be considered 22 as replacing a like amount included in the expenditure 23 limitation for the fiscal year in which the transfer is made. 24 Sec. 9. NEW SECTION . 8.57G Safety net fund. 25 1. A safety net fund is created. The fund shall be separate 26 from the general fund of the state and the balance in the fund 27 shall not be considered part of the balance of the general fund 28 of the state. The moneys credited to the fund are not subject 29 to section 8.33 and shall not be transferred, used, obligated, 30 appropriated, or otherwise encumbered except as provided in 31 this section. 32 2. The maximum balance of the fund is the amount equal to 33 two percent of the adjusted revenue estimate for the fiscal 34 year. 35 -3- LSB 1131XS (4) 88 ns/tm 3/ 9

S.F. 294 3. Moneys in the safety net fund shall only be used pursuant 1 to appropriations or transfers made by the general assembly 2 to augment appropriations made for important education, 3 employment, health, human services, and other programs to aid 4 individuals and families with low income. 5 4. a. Moneys in the safety net fund may be used for cash 6 flow purposes during a fiscal year provided that any moneys so 7 allocated are returned to the fund by the end of that fiscal 8 year. 9 b. Except as provided in section 8.58, the safety net fund 10 shall be considered a special account for the purposes of 11 section 8.53 in determining the cash position of the general 12 fund of the state for the payment of state obligations. 13 5. Notwithstanding section 12C.7, subsection 2, interest 14 or earnings on moneys deposited in the safety net fund shall 15 be credited to the fund. 16 Sec. 10. Section 8.58, Code 2019, is amended to read as 17 follows: 18 8.58 Exemption from automatic application. 19 1. To the extent that moneys appropriated under section 20 8.57 do not result in moneys being credited to the general fund 21 under section 8.55, subsection 2 , moneys Moneys appropriated 22 under section 8.57 and moneys contained in the cash reserve 23 fund, rebuild Iowa infrastructure fund, environment first 24 fund, Iowa economic emergency fund, taxpayer relief fund, 25 and state bond repayment fund , and safety net fund shall 26 not be considered in the application of any formula, index, 27 or other statutory triggering mechanism which would affect 28 appropriations, payments, or taxation rates, contrary 29 provisions of the Code notwithstanding. To the extent that 30 moneys projected to be transferred from the taxpayer relief 31 fund to the general fund of the state pursuant to section 8.57E 32 replace revenues reduced pursuant to section 422.5B, such 33 revenue reduction shall not be considered by such arbitrator or 34 in such negotiations in the application of such mechanisms that 35 -4- LSB 1131XS (4) 88 ns/tm 4/ 9

S.F. 294 affect appropriations, payments, or taxation rates. 1 2. To the extent that moneys appropriated under section 2 8.57 do not result in moneys being credited to the general fund 3 under section 8.55, subsection 2 , moneys Moneys appropriated 4 under section 8.57 and moneys contained in the cash reserve 5 fund, rebuild Iowa infrastructure fund, environment first 6 fund, Iowa economic emergency fund, taxpayer relief fund, and 7 state bond repayment fund , and safety net fund shall not be 8 considered by an arbitrator or in negotiations under chapter 9 20 . To the extent that moneys projected to be transferred 10 from the taxpayer relief fund to the general fund of the state 11 pursuant to section 8.57E replace revenues reduced pursuant to 12 section 422.5B, such revenue reduction shall not be considered 13 by such arbitrator or in such negotiations in the application 14 of such mechanisms that affect appropriations, payments, or 15 taxation rates. 16 Sec. 11. Section 422.5, subsection 1, paragraph a, Code 17 2019, is amended to read as follows: 18 a. A tax is imposed upon every resident and nonresident 19 of the state which tax shall be levied, collected, and paid 20 annually upon and with respect to the entire taxable income as 21 defined in this division at rates as provided in section 422.5A 22 reduced as provided in section 422.5B . 23 Sec. 12. NEW SECTION . 422.5B Taxpayer relief fund —— rate 24 reduction. 25 For the tax year beginning January 1 immediately preceding 26 July 1 of any fiscal year in which a transfer is made from the 27 taxpayer relief fund to the general fund of the state pursuant 28 to section 8.57E, subsection 2, paragraph “b” , each rate in 29 section 422.5A shall be reduced, and rounded to the nearest 30 one-hundredth of one percent, by the percentage that the amount 31 transferred during the fiscal year from the taxpayer relief 32 fund to the general fund bears to the actual net revenue for 33 the general fund for the fiscal year immediately preceding 34 the fiscal year in which such transfer was made. A tax rate 35 -5- LSB 1131XS (4) 88 ns/tm 5/ 9

S.F. 294 reduction provided in this section only applies to the tax year 1 which is the subject of the rate reduction and shall not affect 2 tax rates in any successive tax year. The department shall 3 draft the income tax form for any tax year in which rates are 4 reduced under this section to provide information to taxpayers 5 necessary to calculate the tax due. 6 Sec. 13. Section 422.16, subsection 1, paragraph a, Code 7 2019, is amended to read as follows: 8 a. Every withholding agent and every employer as defined 9 in this chapter and further defined in the Internal Revenue 10 Code, with respect to income tax collected at source, making 11 payment of wages to a nonresident employee working in Iowa, 12 or to a resident employee, shall deduct and withhold from the 13 wages an amount which will approximate the employee’s annual 14 tax liability on a calendar year basis, calculated on the 15 basis of tables to be prepared by the department and schedules 16 or percentage rates, based on the wages, to be prescribed by 17 the department , and calculated without regard to the rate 18 reductions provided in section 422.5B . Every employee or 19 other person shall declare to the employer or withholding 20 agent the number of the employee’s or other person’s personal 21 allowances to be used in applying the tables and schedules or 22 percentage rates. However, no greater number of allowances 23 may be declared by the employee or other person than the 24 number to which the employee or other person is entitled 25 except as allowed under sections 3402(m)(1) and 3402(m)(3) 26 of the Internal Revenue Code and as allowed for the child 27 and dependent care credit provided in section 422.12C . The 28 claiming of allowances in excess of entitlement is a serious 29 misdemeanor. 30 Sec. 14. EFFECTIVE DATE. This Act takes effect July 1, 31 2020. 32 Sec. 15. APPLICABILITY. The following are first applicable 33 to calculate the state general fund expenditure limitation for 34 the fiscal year beginning July 1, 2020: 35 -6- LSB 1131XS (4) 88 ns/tm 6/ 9

S.F. 294 1. The sections of this Act amending section 8.54. 1 2. The sections of this Act amending section 8.55. 2 Sec. 16. APPLICABILITY. The following apply to tax years 3 beginning on or after January 1, 2021: 4 1. The section of this Act amending section 422.5. 5 2. The section of this Act enacting section 422.5B. 6 3. The section of this Act amending section 422.16. 7 EXPLANATION 8 The inclusion of this explanation does not constitute agreement with 9 the explanation’s substance by the members of the general assembly. 10 This bill relates to the state general fund expenditure 11 limitation by revising calculation requirements for the 12 limitation, creating a safety net fund, making transfers, 13 and providing for related state personal income tax rate 14 reductions. 15 The bill amends Code section 8.54, relating to the state 16 general fund expenditure limitation, to provide an additional 17 method for calculating the limitation. Under current law, the 18 limitation is 99 percent of the adjusted revenue estimate for 19 the following fiscal year based on an estimate approved by the 20 revenue estimating conference in a meeting held by December 21 15. The new calculation method in the bill is based on the 22 growth in the average wage and salary component of the state 23 personal income table for Iowa issued each quarter by the 24 bureau of economic analysis of the United States department of 25 commerce. Under the new method, the department of management 26 and the legislative services agency are directed to apply the 27 component issued for the quarters of a two-year period to 28 jointly calculate a wage and salary growth factor percentage. 29 One-half of this percentage amount, combined with 100 percent, 30 is applied to the amount of the state general fund expenditure 31 limitation for the prior fiscal year (fiscal year in progress). 32 The lesser amount identified by the two methods is required to 33 be used as the state general fund expenditure limitation in the 34 budget process for the following fiscal year. 35 -7- LSB 1131XS (4) 88 ns/tm 7/ 9

S.F. 294 Under current law, if a surplus is anticipated for the 1 general fund of the state at the close of a fiscal year, any 2 excess remaining, after the surplus is applied to bring state 3 reserve funds to their maximum balances, is transferred back 4 to the state general fund for the following fiscal year. The 5 original state general fund expenditure limitation for that 6 following fiscal year is required to be readjusted to reflect 7 the amount of excess anticipated to be transferred. The bill 8 strikes the current law requirements for the excess in Code 9 sections 8.54(5) and 8.55(2) and instead requires the excess 10 to be transferred to the safety net fund created by the bill, 11 up to the maximum balance for the safety net fund which is 12 established at 2 percent of the adjusted revenue estimate for 13 the fiscal year, and then entire remainder to be transferred to 14 the taxpayer relief fund. 15 The bill creates a safety net fund separate from the 16 general fund. Moneys in the fund must only be used pursuant 17 to appropriations or transfers made by the general assembly 18 to augment appropriations made for important education, 19 employment, health, human services, and other programs to aid 20 individuals and families with low income. Moneys in the safety 21 net fund are treated similarly to other reserve funds under 22 Code section 8.58 and exempted from automatic application in 23 triggering mechanisms which affect appropriations, payments, or 24 taxation rates, and cannot be considered by an arbitrator or in 25 collective bargaining negotiations under Code chapter 20. 26 Moneys transferred to the taxpayer relief fund are required 27 to be transferred to the general fund of the state by the 28 end of the same fiscal year and treated as a replacement of 29 revenue resulting from the individual income tax rate reduction 30 provided for in the bill. 31 For tax years beginning January 1 immediately preceding July 32 1 of a fiscal year in which a transfer is made from the taxpayer 33 relief fund to the general fund, the rates for each of the nine 34 tax brackets of the individual income tax are required to be 35 -8- LSB 1131XS (4) 88 ns/tm 8/ 9

S.F. 294 reduced by the percentage that the amount transferred to the 1 general fund bears to the state’s actual net revenue for the 2 preceding fiscal year. Tax rate reductions only apply for one 3 tax year and do not affect tax rates in any successive tax 4 year. Withholding agents and employers are prohibited from 5 factoring in such an individual income tax rate reduction in 6 their calculation of appropriate employee withholding amounts 7 during a tax year. Under the bill, the tax year beginning 8 January 1, 2021, is the first tax year to which the individual 9 income tax rate reduction may apply. 10 The bill takes effect July 1, 2020. However, the provisions 11 affecting calculation of the state general fund expenditure 12 limitation are first applicable for the budget process for FY 13 2020-2021. 14 -9- LSB 1131XS (4) 88 ns/tm 9/ 9