Iowa Senate votes to abolish estate taxes and accelerate income tax cuts

The Iowa Senate unanimously passed legislation to eliminate the state’s estate tax and introduce planned income tax cuts more quickly, advancing one of the top priorities Republican Governor Kim Reynolds’ legislative elections.

The bill, Senate File 576, passed the house on Wednesday on a 46-0 vote, with four senators absent. He is now going to the Iowa House for examination.

“The bill provides tax relief for hard-working Iowans: nurses, cops, grocery store workers, anyone who has worked during this pandemic and had no other options to get relief,” said the bill’s leader, Sen. Dan Dawson, R-Council Bluffs.

The bill would remove two revenue targets, known as triggers, that appeared in a previous income tax cut law to ensure state revenues were healthy before further cuts were n come into force. It would also eliminate Iowa’s three-year estate tax.

If the bill becomes law, three changes could come into effect on January 1, 2023.

  • Lower the top personal income tax rate from 8.53% to 6.5%.
  • Reduce the number of Iowa income tax brackets from nine to four.
  • End the ability to deduct personal income tax paid to the federal government.

With the triggers currently in effect under a 2018 law, these tax changes can only come into effect if two conditions are met:

  • Iowa general fund revenue must equal or exceed $8,314,600,000.
  • State revenues must increase by at least 4% compared to the previous financial year.

Phasing out the estate tax would reduce Iowa’s general fund revenue by about $17.9 million in its first year, before climbing to $102.3 million in its first year. sixth year, for a total of about $416.6 million over six years, according to an analysis by the nonpartisan body. Legislative Services Agency.

A previous LSA analysis found that the tax cuts that would take effect by eliminating the triggers would reduce state general fund revenue by about $1.25 billion over four years, starting with a cut of $124 billion. $.5 million in the first year the reductions take effect and rising to $455.4 million in the fourth year.

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Surprise support from Democrats

Democrats surprised fellow Republicans in debate on the floor on Wednesday by announcing they would support the bill, despite their opposition in committee. Republicans hold a 32-18 majority in the Senate.

Democrats gave two reasons for their support: They said they expect the state to be likely on track to meet triggers in time, allowing income tax cuts to take effect in any event. And they said inheritance tax is overwhelmingly imposed on middle- and low-income households.

“I’m going to stand here today and say it’s very likely, very likely that we’ll hit those triggers before 2024,” said Sen. Pam Jochum, D-Dubuque. “So I’m going to support that part of this bill. I think it’s a good idea.”

Estate tax applies to estates of $25,000 or more. Children, parents, grandparents and other direct descendants or ancestors of the deceased are exempt. The tax rate varies from 5% to 15% depending on whether inheritances are left to other relatives, charitable or religious organizations, for-profit corporations or others.

Jochum pointed to an Iowa Department of Revenue study that showed 92.5% of estate taxes in a sample of recent tax returns were assessed on households with adjusted gross income of $80,000 or less.

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“The vast majority of Iowans who inherit money from a deceased person make less than $80,000 a year,” Jochum said. “Quite a middle class family in this state.”

Sen. Janet Petersen, D-Des Moines, said eliminating estate taxes would benefit LGBTQ Iowans who want to leave money to loved ones who aren’t children, parents or grandparents.

“I believe that love is bigger than government and any other institution and that we as government shouldn’t decide who deserves a tax-free inheritance and who doesn’t,” Petersen said. .

Dawson didn’t seem to expect unanimous support for the proposal.

“I will keep my comments somewhat abbreviated because I think we actually have a bipartisan bill here today,” he said in his closing comments on the bill.

Republicans slam ‘massive constitutional overreach’ in federal stimulus

One area of ​​uncertainty surrounding the bill is a provision in the latest federal stimulus package that prohibits states from using federal relief money to directly or indirectly offset further tax cuts.

Ohio’s Republican attorney general sued President Joe Biden’s administration on Wednesday, arguing that the law places unconstitutional limits on states’ ability to access some federal aid, according to the Washington Post.

A U.S. Treasury Department spokesman later said states could still cut taxes as long as they didn’t use pandemic relief funds to pay for those tax cuts.

Dawson said federal language would not prevent Iowa from pursuing tax cuts.

“We will not delay our tax policy based on the whims of the federal government,” he said. “And if our federal government overlords wish to continue down this path of massive constitutional overreach on the normal activities of state tax policy, it is very likely that the states will see the federal government in court.”

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Dawson also defended the decision to pass the bill without waiting for the latest state revenue estimates on Friday, and without first reaching an agreement with the House on the state budget.

“Iowa has the fiscal capacity to address these priorities, and Senate Republicans will ensure that these priorities are part of the final discussion to close this session,” Dawson said.

House Speaker Pat Grassley, R-New Hartford, has frequently praised the triggers included in previous income tax reduction legislation and said the state must ensure that he could meet his financial obligations. Like the Senate, the House is controlled by Republicans.

On Thursday, Grassley told reporters that upcoming revenue estimates could make the trigger part of the tax conversation moot, but House Republicans still want to be cautious.

“We could sit here tomorrow and income has increased to the point that it’s not a problem anymore,” he said. “But if that’s not the case, we’re going to take a cautious approach to looking at the triggers. It was something that our caucus felt very strongly about. But we recognize that’s been a priority of the governor, so we’re going to engage in these conversations.”

Democratic House Leader Todd Prichard, D-Charles City, said Thursday he had concerns about how the tax cuts might interact with the federal stimulus. Right now, he said, Democrats are waiting to see what comes up for debate.

“Democrats have long supported tax cuts for Iowa workers and, you know, Iowa’s middle class,” he said. “Those who need help with their daily operations to pay their bills, pay their rent or put food on the table and that’s where we think the tax cuts should be focused.”

Stephen Gruber-Miller covers the Iowa Statehouse and politics for the registry. He can be reached by email at [email protected] or by phone at 515-284-8169. Follow him on Twitter at @sgrubermiller.

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