The Link: Iowa Senate passes inheritance, acceleration of income tax reductions bill despite fiscal dilemmas

Date of Publication: March 18, 2021

Source: The Center Square

Reading Time: 2 min

 

The Iowa Senate has unanimously approved a bill that would gradually phase out the state’s inheritance tax, eliminating it entirely by 2024. Senate File 576, passed on March 17, establishes a step-by-step reduction: a 25% decrease in 2021, 50% in 2022, 75% in 2023, with all amounts rounded to the nearest one-hundredth of a percent. 

“The Iowa Senate unanimously passed a bill that would phase out the state’s inheritance tax over a three-year period, eliminating it completely in 2024.”

The Centre Square article reports that the “The Iowa Association of Business and Industry” lobbied in support of this bill.  ABI President Mike Ralston shared this with Executorium regarding the new Iowa inheritance tax legislation,

“All Iowans benefit from the phase-out of the state’s inheritance tax.  Taxes have already been paid on these assets as the estate was grown over the years.  By eliminating the inheritance tax, more money can be invested in businesses and farms and go to support Iowa families.”

Currently, inheritances received by spouses, children, grandchildren, parents, and grandparents are exempt from Iowa’s inheritance tax. However, property passing to siblings, their spouses, in-laws, other relatives, or for-profit organizations is subject to taxation based on the estate’s value. Bequests exceeding $500 for religious purposes face a 10% tax rate.

Under current law, inheritance tax revenue is projected to grow 3.5% annually after fiscal year 2022. The Department of Revenue estimates that the 2023 changes will reduce individual income tax liability by $297.6 million in 2023, $43.7 million in 2024, and approximately $8 million annually beginning in 2025. The bill also triggers certain adjustments to individual income tax liability effective January 1, 2023.

Existing 2018 law established two revenue triggers to implement tax changes: actual general fund net revenue reaching $8.32 billion and general fund growth exceeding 104% of the previous year. The Revenue Estimating Council projected in December 2020 that fiscal year 2022 would fall slightly below both triggers, though it noted this did not preclude meeting them later in the fiscal year.

Critics, including Common Good Iowa, have expressed concern that the bill could reduce state benefits from the American Rescue Plan Act (ARPA), which has allocated an estimated $1.38 billion to Iowa. The organization also criticized the legislative process, saying the bill advanced before a fiscal note was issued.

Supporters argue the bill provides certainty for businesses and families. Sen. Dan Dawson, R-Council Bluffs, emphasized Iowa’s autonomy over tax policy, while the Iowa Association of Business and Industry called the legislation “pro-growth” and said it addresses equity issues in the inheritance tax. Sen. Pam Jochum, D-Dubuque, supported the measure despite some concerns, citing potential economic benefits and probable revenue growth that would offset costs.

The bill represents a significant shift in Iowa’s tax policy, with gradual reductions designed to relieve families and businesses while providing predictability in the state’s financial planning.