Senate Study Bill 1126 - Introduced SENATE FILE _____ BY (PROPOSED COMMITTEE ON WAYS AND MEANS BILL BY CHAIRPERSON DAWSON) A BILL FOR An Act relating to individual and corporate income taxes, the 1 insurance premium tax, and including the contingent repeal 2 of the individual income tax, and including effective date 3 provisions. 4 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 5 TLSB 1993XC (11) 90 jm/jh

S.F. _____ DIVISION I 1 FUTURE INDIVIDUAL INCOME TAX RATE CHANGES 2 Section 1. Section 422.5, subsection 2, paragraph b, 3 subparagraph (2), Code 2023, is amended to read as follows: 4 (2) (a) (i) (A) For the tax year beginning on or after 5 January 1, 2023, but before January 1, 2024, the alternate tax 6 rate is 6.00 percent. 7 (B) For the tax year beginning on or after January 1, 2024, 8 but before January 1, 2025, the alternate tax rate is 5.70 9 percent. 10 (C) For the tax year beginning on or after January 1, 2025, 11 but before January 1, 2026, the alternate tax rate is 5.20 4.80 12 percent. 13 (D) For the tax year beginning on or after January 1, 2026, 14 but before January 1, 2027, the alternate tax rate is 3.95 15 percent. 16 (E) For the tax year beginning on or after January 1, 2027, 17 but before January 1, 2028, the alternate tax rate is 3.35 18 percent. 19 (ii) This subparagraph division (a) is repealed January 1, 20 2026 2028 . 21 (b) For tax years beginning on or after January 1, 2026 22 2028 , the alternate tax rate is 4.40 3.00 percent. 23 Sec. 2. Section 422.5, subsection 3, paragraph b, 24 subparagraph (2), Code 2023, is amended to read as follows: 25 (2) (a) (i) (A) For the tax year beginning on or after 26 January 1, 2023, but before January 1, 2024, the alternate tax 27 rate is 6.00 percent. 28 (B) For the tax year beginning on or after January 1, 2024, 29 but before January 1, 2025, the alternate tax rate is 5.70 30 percent. 31 (C) For the tax year beginning on or after January 1, 2025, 32 but before January 1, 2026, the alternate tax rate is 5.20 4.80 33 percent. 34 (D) For the tax year beginning on or after January 1, 2026, 35 -1- LSB 1993XC (11) 90 jm/jh 1/ 12

S.F. _____ but before January 1, 2027, the alternate tax rate is 3.95 1 percent. 2 (E) For the tax year beginning on or after January 1, 2027, 3 but before January 1, 2028, the alternate tax rate is 3.35 4 percent. 5 (ii) This subparagraph division (a) is repealed January 1, 6 2026 2028 . 7 (b) For tax years beginning on or after January 1, 2026 8 2028 , the alternate tax rate is 4.40 3.00 percent. 9 Sec. 3. Section 422.5A, subsection 1, paragraph a, 10 subparagraph (3), Code 2023, is amended to read as follows: 11 (3) For the tax year beginning on or after January 1, 2025, 12 but before January 1, 2026: 13 (a) On taxable income from 0 through $12,000, the rate of 14 4.40 4.00 percent. 15 (b) On taxable income exceeding $12,000, the rate of 4.82 16 4.40 percent. 17 Sec. 4. Section 422.5A, subsection 1, paragraph b, 18 subparagraph (3), Code 2023, is amended to read as follows: 19 (3) For the tax year beginning on or after January 1, 2025, 20 but before January 1, 2026: 21 (a) On taxable income from 0 through $6,000, the rate of 22 4.40 4.00 percent. 23 (b) On taxable income exceeding $6,000, the rate of 4.82 24 4.40 percent. 25 Sec. 5. 2022 Iowa Acts, chapter 1002, section 20, is amended 26 to read as follows: 27 SEC. 20. Section 422.5, subsection 1 , paragraph a, Code 28 2022, is amended to read as follows: 29 a. (1) A tax is imposed upon every resident and nonresident 30 of the state which tax shall be levied, collected, and paid 31 annually upon and with respect to the entire taxable income as 32 defined in this subchapter at a rate of three and nine-tenths 33 percent. the following rates in the following tax years: 34 (a) For the tax year beginning on or after January 1, 2026, 35 -2- LSB 1993XC (11) 90 jm/jh 2/ 12

S.F. _____ but before January 1, 2027, the rate of 3.55 percent. 1 (b) For the tax year beginning on or after January 1, 2027, 2 but before January 1, 2028, the rate of 2.95 percent. 3 (c) For tax years beginning on or after January 1, 2028, the 4 rate of 2.50 percent. 5 (2) (a) Notwithstanding the rate in subparagraph (1), the 6 department of revenue shall determine the individual income 7 tax rate as provided in this subparagraph. The tax rate in 8 subparagraph (1) shall remain in effect until the rate is 9 adjusted pursuant to this subparagraph. A rate adjusted in 10 this subparagraph shall remain in effect until the rate is 11 adjusted again pursuant to this subparagraph. 12 (b) By November 1, 2029, and by November 1 each year 13 thereafter, until the individual income tax rate equals zero, 14 the department of management shall determine the amount of 15 moneys available in the individual income tax elimination fund 16 in section 8.57E, and the net individual income tax receipts 17 at the close of the preceding fiscal year. The department of 18 revenue shall adjust and apply a new rate based upon the amount 19 of moneys available in the individual income tax elimination 20 fund as provided in subparagraph division (c). 21 (c) (i) The rate shall be adjusted in such a way that the 22 rate would have generated an amount equal to the net receipts 23 generated from the rate in the preceding fiscal year less the 24 amount available in the individual income tax elimination 25 fund in section 8.57E that is used in the calculation in this 26 subparagraph division. 27 (ii) The rate shall not be adjusted unless the rate is able 28 to be adjusted at least one-tenth of one percent. The rate, 29 when adjusted, shall be rounded down to the nearest one-tenth 30 of one percent. 31 (iii) If a determination is made by the department of 32 revenue that the rate is subject to adjustment, the department 33 of revenue shall adjust the rate specified in subparagraph 34 (1), or if the rate has been previously adjusted, adjust the 35 -3- LSB 1993XC (11) 90 jm/jh 3/ 12

S.F. _____ previously adjusted rate. 1 (d) If an adjustment is made pursuant to subparagraph 2 division (c), the amount of moneys in the individual income 3 tax elimination fund used in the calculation in subparagraph 4 division (c) shall be transferred to the general fund of the 5 state in the fiscal year the rate is adjusted. 6 (e) If a rate is adjusted pursuant to subparagraph division 7 (c), the director of revenue shall cause an advisory notice 8 containing the new individual income tax rate to be published 9 in the Iowa administrative bulletin and on the internet site 10 of the department of revenue. The calculation and publication 11 of the adjusted tax rate by the director of revenue is exempt 12 from chapter 17A, and shall be submitted for publication by the 13 first December 31 following the determination date to adjust 14 the rate. 15 DIVISION II 16 FUTURE CORPORATE INCOME TAX RATE CHANGES 17 Sec. 6. Section 422.33, subsection 1, paragraph b, 18 subparagraph (1), subparagraph division (b), Code 2023, is 19 amended to read as follows: 20 (b) By November 1, 2022, and by November 1 each year 21 thereafter, the department of management shall determine 22 the net corporate income tax receipts for the fiscal year 23 preceding the determination date. If net corporate income 24 tax receipts for the preceding fiscal year exceed seven six 25 hundred eighty million dollars, the department of revenue shall 26 adjust and apply new corporate income tax rates as provided in 27 subparagraph (2). 28 Sec. 7. Section 422.33, subsection 1, paragraph b, 29 subparagraph (2), subparagraph division (a), Code 2023, is 30 amended to read as follows: 31 (a) If a determination has been made that net corporate 32 income tax receipts for the preceding fiscal year exceeded 33 seven six hundred eighty million dollars, the department of 34 revenue shall adjust the tax rates specified in paragraph “a” , 35 -4- LSB 1993XC (11) 90 jm/jh 4/ 12

S.F. _____ subparagraphs (3) and (4), and apply the adjusted rates for tax 1 years beginning on or after the next January 1 following the 2 determination date. 3 Sec. 8. Section 422.33, subsection 1, paragraph b, 4 subparagraph (2), subparagraph division (b), subparagraph 5 subdivision (i), Code 2023, is amended to read as follows: 6 (i) The tax rates subject to adjustment shall be adjusted 7 in such a way that when combined with all the other rates 8 specified in paragraph “a” , the tax rates would have generated 9 net corporate income tax receipts that equal seven six hundred 10 eighty million dollars in the preceding fiscal year. 11 Sec. 9. Section 422.33, subsection 1, paragraph b, 12 subparagraph (2), subparagraph division (b), subparagraph 13 subdivision (iii), Code 2023, is amended to read as follows: 14 (iii) The tax rates adjusted pursuant to this paragraph 15 shall not be adjusted below five and one-half four and 16 three-fourths percent. 17 Sec. 10. 2022 Iowa Acts, chapter 1002, sections 57 and 58, 18 are amended to read as follows: 19 SEC. 57. Section 422.33, subsection 1 , Code 2022, is amended 20 by striking the subsection and inserting in lieu thereof the 21 following: 22 1. A tax is imposed annually upon each corporation doing 23 business in this state, or deriving income from sources within 24 this state, in an amount computed by applying the rate of five 25 and one-half four and three-fourths percent to the net income 26 received by the corporation during the income year. 27 SEC. 58. CONTINGENT EFFECTIVE DATE. This division of 28 this Act takes effect on the first January 1 after each rate 29 of taxation on the net income received by a corporation is 30 equalized to equal five and one-half four and three-fourths 31 percent pursuant to section 422.33, subsection 1 , paragraph 32 “b”, as amended by this Act. The director of revenue shall 33 inform the Code editor upon the occurrence of this contingency. 34 DIVISION III 35 -5- LSB 1993XC (11) 90 jm/jh 5/ 12

S.F. _____ INSURANCE PREMIUM TAX 1 Sec. 11. Section 432.1, subsection 2, Code 2023, is amended 2 to read as follows: 3 2. The “applicable percent” for purposes of subsection 1 of 4 this section and section 432.2 is the following: 5 a. For calendar years beginning before the 2003 calendar 6 year, two percent. 7 b. For the 2003 calendar year, one and three-fourths 8 percent. 9 c. For the 2004 calendar year, one and one-half percent. 10 d. For the 2005 calendar year, one and one-fourth percent. 11 e. For the 2006 and subsequent calendar years year through 12 the 2024 calendar year , one percent. 13 f. For the 2025 calendar year, ninety-five hundredths of one 14 percent. 15 g. For the 2026 and subsequent calendar years, nine-tenths 16 of one percent. 17 Sec. 12. Section 432.1, subsection 4, Code 2023, is amended 18 to read as follows: 19 4. The “applicable percent” for purposes of subsection 3 is 20 the following: 21 a. For calendar years beginning before the 2004 calendar 22 year, two percent. 23 b. For the 2004 calendar year, one and three-fourths 24 percent. 25 c. For the 2005 calendar year, one and one-half percent. 26 d. For the 2006 calendar year, one and one-fourth percent. 27 e. For the 2007 and subsequent calendar years year through 28 the 2024 calendar year , one percent. 29 f. For the 2025 calendar year, ninety-five hundredths of one 30 percent. 31 g. For the 2026 and subsequent calendar years, nine-tenths 32 of one percent. 33 DIVISION IV 34 INDIVIDUAL INCOME TAX ELIMINATION FUND 35 -6- LSB 1993XC (11) 90 jm/jh 6/ 12

S.F. _____ Sec. 13. Section 8.54, subsection 5, paragraph b, Code 2023, 1 is amended to read as follows: 2 b. For fiscal years in which it is anticipated that moneys 3 will be transferred from the taxpayer relief individual 4 income tax elimination fund to the general fund of the state 5 in accordance with section 8.57E, subsection 2 , paragraph 6 “b” , the original state general fund expenditure limitation 7 amount provided for in subsection 3 shall be readjusted to 8 include the amount of moneys anticipated to be so transferred. 9 This paragraph is repealed on the date that section 8.57E, 10 subsection 2 , paragraph “b” , is repealed. 11 Sec. 14. Section 8.55, subsection 2, paragraph a, Code 2023, 12 is amended to read as follows: 13 a. The difference between the actual net revenue for the 14 general fund of the state for the fiscal year and the adjusted 15 revenue estimate for the fiscal year shall be transferred to 16 the taxpayer relief individual income tax elimination fund 17 created in section 8.57E . 18 Sec. 15. Section 8.57E, Code 2023, is amended to read as 19 follows: 20 8.57E Taxpayer relief Individual income tax elimination fund. 21 1. A taxpayer relief An individual income tax elimination 22 fund is created. The fund shall be separate from the general 23 fund of the state and the balance in the fund shall not be 24 considered part of the balance of the general fund of the 25 state. The moneys credited to the fund are not subject to 26 section 8.33 and shall not be transferred, used, obligated, 27 appropriated, or otherwise encumbered except as provided in 28 this section . 29 2. a. Except as otherwise provided in this section , moneys 30 in the taxpayer relief individual income tax elimination fund 31 shall only be used pursuant to appropriations or transfers made 32 by the general assembly for tax relief or reductions in income 33 tax rates. 34 b. (1) For the fiscal year beginning July 1, 2023, and for 35 -7- LSB 1993XC (11) 90 jm/jh 7/ 12

S.F. _____ each fiscal year thereafter, if the actual net revenue for the 1 general fund of the state for the fiscal year plus the amount 2 transferred to the general fund of the state under section 3 8.55, subsection 2 , paragraph “b” , for the fiscal year, if 4 any, is less than one hundred three and one-half percent of 5 the actual net revenue for the general fund of the state for 6 the prior fiscal year, there is transferred from the taxpayer 7 relief individual income tax elimination fund to the general 8 fund of the state an amount equal to the difference or the 9 remaining balance of the taxpayer relief individual income tax 10 elimination fund, whichever is lower, subject to subparagraph 11 (2). 12 (2) The transfer made under subparagraph (1) shall not 13 exceed an amount necessary to increase the ending balance 14 of the general fund of the state for the fiscal year to one 15 percent of the adjusted revenue estimate, as defined in section 16 8.54 , for the fiscal year. 17 (3) This paragraph is repealed on the date the remaining 18 balance of the taxpayer relief individual income tax 19 elimination fund is transferred to the general fund of the 20 state under subparagraph (1). 21 3. a. Moneys in the taxpayer relief individual income tax 22 elimination fund may be used for cash flow purposes during a 23 fiscal year provided that any moneys so allocated are returned 24 to the fund by the end of that fiscal year. 25 b. Except as provided in section 8.58 , the taxpayer relief 26 individual income tax elimination fund shall be considered a 27 special account for the purposes of section 8.53 in determining 28 the cash position of the general fund of the state for the 29 payment of state obligations. 30 4. Notwithstanding section 12C.7, subsection 2 , interest or 31 earnings on moneys deposited in the taxpayer relief individual 32 income tax elimination fund shall be credited to the fund. 33 Sec. 16. Section 8.58, Code 2023, is amended to read as 34 follows: 35 -8- LSB 1993XC (11) 90 jm/jh 8/ 12

S.F. _____ 8.58 Exemption from automatic application. 1 1. 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 appropriated under 4 section 8.57 and moneys contained in the cash reserve fund, 5 rebuild Iowa infrastructure fund, environment first fund, Iowa 6 economic emergency fund, taxpayer relief individual income tax 7 elimination fund, state bond repayment fund, Iowa coronavirus 8 fiscal recovery fund, and Iowa coronavirus capital projects 9 fund shall not be considered in the application of any formula, 10 index, or other statutory triggering mechanism which would 11 affect appropriations, payments, or taxation rates, contrary 12 provisions of the Code notwithstanding. 13 2. To the extent that moneys appropriated under section 14 8.57 do not result in moneys being credited to the general 15 fund under section 8.55, subsection 2 , moneys appropriated 16 under section 8.57 and moneys contained in the cash reserve 17 fund, rebuild Iowa infrastructure fund, environment first 18 fund, Iowa economic emergency fund, taxpayer relief individual 19 income tax elimination fund, state bond repayment fund, Iowa 20 coronavirus fiscal recovery fund, and Iowa coronavirus capital 21 projects fund shall not be considered by an arbitrator or in 22 negotiations under chapter 20 . 23 Sec. 17. EFFECTIVE DATE. This division of this Act takes 24 effect January 1, 2026. 25 EXPLANATION 26 The inclusion of this explanation does not constitute agreement with 27 the explanation’s substance by the members of the general assembly. 28 This bill reduces the individual and corporate income tax 29 rates and the insurance premium tax rates. 30 DIVISION I —— FUTURE INDIVIDUAL INCOME TAX RATE CHANGES. 31 The bill reduces the individual income tax rates for the tax 32 year beginning January 1, 2025, but before January 1, 2026, as 33 follows: 34 Married filing jointly 35 -9- LSB 1993XC (11) 90 jm/jh 9/ 12

S.F. _____ Income over: But not over: Tax rate: 1 1) $0 $12,000 4.00% 2 2) $12,000 4.40% 3 All other filers other than married filing jointly 4 Income over: But not over: Tax rate: 5 1) $0 $6,000 4.00% 6 2) $6,000 4.40% 7 The bill further reduces the 3.90 percent individual flat 8 income tax rate established for tax years beginning on or after 9 January 1, 2026, in 2022 Iowa Acts, chapter 1002, section 20. 10 For the tax year beginning on or after January 1, 2026, but 11 before January 1, 2027, the bill reduces the individual tax 12 rate to 3.55 percent. For the tax year beginning on or after 13 January 1, 2027, but before January 1, 2028, the bill reduces 14 the individual income tax rate to 2.95 percent. For tax years 15 beginning on or after January 1, 2028, the bill reduces the 16 individual income tax rate at 2.50 percent. 17 Currently, an alternate income tax calculation exists 18 in Code section 422.5. The alternate income tax is an 19 alternate method of calculating income tax liability in lieu 20 of the regular income tax calculation. The alternate method 21 multiplies the taxpayer’s taxable income above the income tax 22 filing thresholds in Code section 422.5(2)(b) or 422.5(3)(b) 23 by the highest existing individual income tax rate until 24 the taxpayer’s tax liability is equal to the tax liability 25 that would have been calculated under the regular income tax 26 calculation method, then after such point the regular income 27 tax calculation with the regular income tax rates are used. 28 The bill phases in changes to the alternate tax rate until the 29 rate is set at 3.00 percent commencing with tax years beginning 30 on or after January 1, 2028. 31 After reducing the individual income tax rate to 2.50 32 percent, the bill establishes a procedure where the individual 33 income tax rate may be adjusted commencing with tax years 34 beginning on or after January 1, 2030. The bill specifies 35 -10- LSB 1993XC (11) 90 jm/jh 10/ 12

S.F. _____ the individual income tax rate shall be adjusted each tax 1 year until the rate is zero, if sufficient funds to make 2 the adjustment are available in the individual income tax 3 elimination fund. The bill changes the name of the taxpayer 4 relief fund to the individual income tax elimination fund later 5 in the bill. 6 By November 1, 2029, and by November 1 each year thereafter, 7 the department of management shall determine the amount of 8 moneys available in the individual income tax elimination fund, 9 and the net individual income tax receipts at the close of 10 the preceding fiscal year. The department of revenue shall 11 adjust and apply a new individual income tax rate based upon 12 the amount of money available in the individual income tax 13 elimination fund. The bill specifies the department of revenue 14 shall adjust and apply a new individual income tax rate in such 15 a way that the rate would have generated an amount equal to the 16 net receipts generated from the rate in the preceding fiscal 17 year less the amount used in the calculation in the individual 18 income tax elimination fund. 19 The bill prohibits the rate from being adjusted unless the 20 rate is able to be adjusted at least one-tenth of 1 percent. 21 The rate, when adjusted, shall be rounded down to the nearest 22 one-tenth of 1 percent. 23 The bill requires the moneys in the individual income tax 24 elimination fund be transferred to the general fund of the 25 state in the fiscal year the rate is adjusted. 26 If a tax rate is adjusted, the bill requires the director 27 of revenue to cause an advisory notice containing the new 28 individual income tax rate to be published in the Iowa 29 administrative bulletin and on the internet site of the 30 department of revenue. The calculation and publication of the 31 adjusted tax rate by the director of revenue is exempt from 32 Code chapter 17A, and shall be submitted for publication by the 33 first December 31 following the determination date to adjust 34 the tax rates. 35 -11- LSB 1993XC (11) 90 jm/jh 11/ 12

S.F. _____ DIVISION II —— FUTURE CORPORATE INCOME TAX RATE CHANGES. 1 Under current law, by November 1 of each year, the department 2 of management shall determine the net corporate income tax 3 receipts for the previous fiscal year, if a determination 4 has been made that net corporate income tax receipts for the 5 preceding fiscal year exceeded $700 million, the department 6 of revenue shall reduce the corporate tax rates and apply the 7 adjusted rates for tax years beginning on or after the next 8 January 1 following such a determination, but the tax rate 9 shall not be adjusted below 5.50 percent. The bill reduces the 10 threshold amount for determining if taxes are to be reduced 11 from $700 million net corporate income tax receipts to $680 12 million net corporate income tax receipts, and reduces the 13 lowest possible adjusted corporate tax rate to 4.75 percent. 14 DIVISION III —— INSURANCE PREMIUMS TAX. The bill reduces 15 the insurance premium tax on the gross amount of premiums 16 received by an insurance company from 1 percent to .95 percent 17 in calendar year 2025, and from .95 percent to .90 percent for 18 the 2026 calendar year and subsequent calendar years. 19 DIVISION IV —— INDIVIDUAL INCOME TAX ELIMINATION FUND. 20 The bill changes the name of the taxpayer relief fund to the 21 individual income tax elimination fund. 22 The division takes effect January 1, 2026. 23 -12- LSB 1993XC (11) 90 jm/jh 12/ 12