DES MOINES, Iowa – The Iowa Senate on Wednesday passed 46 to 0, SF 576, a bill that repeals Iowa’s inheritance tax and state qualified use inheritance tax.
The legislation also removes revenue triggers implemented in the 2018 tax reform law to further drop the income tax rates on January 1, 2023, with the top rate dropping from 8.53 percent to 6.5 percent. Eliminating the trigger will also reduce the number of tax brackets from nine to four and eliminate federal income tax deductibility if Iowa reached that revenue trigger. The trigger required Iowa to reach $8.3 billion in revenue by FY 2022, amounting to 4 percent growth each fiscal year. The state is not on track to meet that trigger in FY 2022.
“We have before us the responsible phase-out and eradication of the inheritance tax, one of the most morbid tax policies we have in our code. Not only does Iowa have the capacity to do these measures, we must do these measures,” State Senator Dan Dawson, R-Council Bluffs, the bill’s floor manager, said in his opening remarks.
The Tax Foundation reports that U.S. Senate amendments to the American Rescue Plan Act of 2021 (ARPA) prohibit using any of the $350 billion in State and Local Fiscal Recovery Funds to cut taxes. So there is a question if any state that accepts those funds can cut taxes before 2024.
Dawson said the new federal law should not deter state lawmakers.
“The federal government will not trounce over states rights and freeze tax policy for the next two years here in Iowa. The framers of this country designed a constitution that laid out three general branches of government generally co-equal, but they also laid out principles that powers not enumerated in the Constitution to the federal government are reserved to the states and the people,” he said.
Dawson said changes made to ARPA were “short sighted and grievous.”
“We will not hold up our tax policy based upon the whims of the federal government, and if our federal government overlords wish to continue down this path of a massive constitutional overreach of the normal business of state tax policy. It’s very likely that states will see the federal government in court,” he stated.
State Senator Pam Jochum, D-Dubuque, reminded the Iowa Senate that the 2018 tax reform law triggers were “guardrails” to ensure the state would be fiscally responsible.
“I’m going to stand here today and say, it’s very probable, very probable that we will hit those triggers before 2024. So I’m going to support that part of this bill. I think it’s a good idea,” she said.
Jochum said she also learned from the Iowa Department of Revenue that the vast majority of Iowans inheriting money from someone who passed away made under $80,000 a year. She also said her family experienced having to pay an inheritance tax. For those reasons, she said she would support the bill even though she opposed it in committee.
“The timing is off,” she cautioned, pointing out that Revenue Estimating Conference will meet on Friday.
“They very well may come out with numbers that show that we have hit our targets. The triggers, I should say, because right now we’re at about 8.2 billion, and about 3.8% growth,” Jochum added.
State Senator Janet Petersen, D-Des Moines, also supported the bill for a different reason.
“I believe that love is bigger than government and any other institution and that we should not as a government be deciding who deserves tax free inheritance and who doesn’t,” she said.
“There are several Iowans living in nursing homes across our state, who never were able to get married, never able to have children because they were gay, or lesbian or transgender. And our society is evolving, but we still have people who are hurting, and many of them have been disowned by their family members when they came forward. And so this bill will help Iowans who are lesbians, gays, transgendered, the whole LGBTQ plus community. And so I believe this is a good thing,” Petersen added.
Dawson said the bill was good policy and encouraged all of his colleagues to pass the bill.
“This bill provides tax relief for vast majority Iowans for almost half of the impact of this bill goes to those making $60,000 or less. The bill provides tax relief for hardworking Iowans, nurses, cops, grocery store workers, everyone who worked through this pandemic and didn’t have other options to receive relief. The bill also streamlines our tax code and makes permanent our tax code—great changes going forward,” he said in his closing comments.
After the vote, Iowa Senate Majority Leader Jack Whitver, R-Ankeny, said the bill was needed to help provide pandemic relief to Iowans.
“SF 576 provides Iowans with permanent and certain tax relief and keeps our promise to Iowans to reduce their tax burden,” he said in a released statement. “One stimulus check wears off in a matter of days or weeks. Permanent tax relief gives small businesses and Iowa families confidence to work and invest in this state. It is a long-term pro-growth strategy to expand career opportunities and help Iowans keep more of their hard-earned money. After today’s vote, I look forward to cutting Iowa income taxes even more in the future.”