February 9, 2009
Glen Dickinson Legislative Services Agency State Capitol Des Moines, IA 50319 Charles Krogmeier Department of Management State Capitol Des Moines, IA 50319 Dear Glen and Charles, The 2009 IRC Update Bill (LSB 1375XD) provides for the updating of references in the Iowa Code to the Internal Revenue Code relative to federal legislation enacted during 2008. The bill will take effect upon enactment and apply retroactively to January 1, 2008. During 2008 Congress enacted six laws that may impact Iowa General Fund tax revenues. These laws are: • • • • • •
Recovery Rebates and Economic Stimulus for the American People Act of 2008 Heartland, Habitat, Harvest and Horticulture Act of 2008 Heroes Earnings Assistance and Relief Tax Act of 2008 Housing Assistance Tax Act of 2008 Emergency Economic Stabilization, Energy Improvement and Extension, and Tax Extenders and AMT Relief Act of 2008 Worker, Retiree, and Employer Recovery Act of 2008
The Recovery Rebates and Economic Stimulus for the American People Act of 2008 was passed last winter, including individual income tax rebates and various corporate income tax adjustments. The 2008 Legislature has already addressed most of Iowa’s treatment of this legislation. The estimated impacts of these provisions are included in the attached tables, but all numbers have been incorporated in IDR December 2008 REC estimates of State revenues. The Heartland, Habitat, Harvest and Horticulture Act of 2008 updated the farm-related provisions, where the only provision with an estimated fiscal impact was a limit on farming losses for high-income taxpayers. The Heroes Earnings Assistance and Relief Tax Act of 2008 included a provision allowing military personnel to include combat pay as earned income when computing earned income tax credit claims.
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The Housing Assistance Tax Act of 2008 allows taxpayers claiming the standard deduction to also claim up to $500 for singles/$1,000 for married in deductions for property taxes paid on a residence. It is assumed that Iowa will not couple with that provision, which has an estimated cost of over $15 million per tax year. The bill also includes a federal income tax credit for firsttime homebuyers. Again, it is assumed Iowa would not couple with that credit, and that Iowa taxpayers would not include the original credit as a federal refund or the repayments of the credit as federal payments when computing Iowa taxable income. The Emergency Economic Stabilization, Energy Improvement and Extension, and Tax Extenders and AMT Relief Act of 2008 includes many tax changes including tax relief for victims of the Midwestern flood and tornado disasters during 2008, a patch to the AMT for tax year 2008 and extensions of other tax provisions, and extensions of various energy tax credits and provisions. One of the disaster-related tax provisions allows taxpayers to claim casualty losses as an additional federal standard deduction in tax year 2008 rather than as an itemized deduction. It is assumed Iowa would not couple with that provision, but would couple with the waiver of the AGI limit and $100 floor on all disaster-related itemized deductions for casualty losses. The Worker, Retiree, and Employer Recovery Act of 2008 includes a waiver of pension and IRA required minimum distributions for TY 2009 which is expected to reduce adjusted gross income and thus tax liability for Iowa taxpayers. Many of the federal tax provisions will not have any direct fiscal impact on Iowa with the enactment of the IRC update bill and were not included in the attached tables. In addition to conformity impacts, which are the impacts specifically addressed by the IRC Update Bill, the federal law changes often impact State revenues because Iowa allows individuals and corporations to deduct all or a portion of federal taxes paid. These deductibility impacts, although not technically the subject of the IRC Update Bill, are summarized in Table 2 in order to provide a complete accounting of the impact of federal tax law changes. A summary of all estimated impacts for 2008 legislation is as follows: Estimated Total Revenue Impacts Resulting from IRC Update Fiscal Year Conformity Impact Deductibility Impact 2009 $ -53.951 $ 4.076 2010 $ -63.028 $ 47.530 2011 $ -33.389 $ 15.645 2012 $ -14.713 $ 5.491
Net Impact $ -49.875 $ -15.498 $ -17.743 $ -9.223
All amounts are in millions of dollars.
Most of the estimates of Iowa impacts associated with conforming with these federal provisions were determined based on U.S. Congress, Joint Committee on Taxation national fiscal impact
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estimates adjusted for differential fiscal years, estimated taxable income shares in Iowa, and State marginal tax rates for affected taxpayers. By the December 2008 REC meeting, the first five pieces of federal legislation had already been passed and the Iowa response to the first had been addressed during the 2008 Legislative Session. For several of the tax extension provisions passed in the fall, it was assumed that Iowa would couple. Therefore, provisions in the Economic Stimulus Act of 2008 and some of the tax extender provisions in the Emergency Economic Stabilization Act of 2008 (the AMT patch, the deduction for college tuition and fees, and the deduction for educator expenses) were included in the IDR December 2008 REC estimate (and incorporated in the final REC estimates). To avoid double-counting, the impacts of these provisions are subtracted from the total in the bottom line of each table, leaving only the updated and new provision costs. IDR’s December 2008 revenues forecasts also included a $16.8 million deduction for estimated casualty loss claims, where $14.7 million reflected the estimated amount expected to be taken on Iowa individual income tax returns for TY 2008 without any change to law. The additional $2.1 million was an early estimate of the conformity cost and was included in the REC estimate. The current conformity cost estimate of the impact of removing the AGI test and $100 minimum limit on those claims is $2.5 million, leaving an additional $0.4 million in conformity cost. Conformity costs are presented in the following table, accounting for those provisions already incorporated in REC revenue estimates. Therefore, the formal fiscal impact of the IRC Update Bill can be found in the final column of the following table or the bottom row of Table 1. Estimated Conformity Adjustments to REC Forecasts Resulting from the IRC Update Fiscal Year Total 2008 Previously Accounted Additional Impact 2009 $ -53.951 $ -16.489 $ -37.462 2010 $ -63.028 $ -13.467 $ -49.562 2011 $ -33.389 $ 0.770 $ -34.159 2012 $ -14.713 $ 0.462 $ -15.175 All amounts are in millions of dollars.
For informational purposes, the next table presents adjustments to the deductibility impacts to account for provisions that were considered in IDR’s December REC revenue estimates. Estimated Deductibility Adjustments to REC Forecasts Resulting from the IRC Update Fiscal Year Total 2008 Previously Accounted Additional Impact 2009 $ 4.076 $ 4.076 $ 0.000 2010 $ 47.530 $ 31.602 $ 16.586 2011 $ 15.645 $ 2.232 $ 13.413 2012 $ 5.491 $ -2.493 $ 7.984 All amounts are in millions of dollars.
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This final table presents the net impact of conformity and deductibility and again adjusts for the provisions that were considered in IDR’s December REC revenue estimates. Bottom-line revenue adjustments attributable to the IRC Update Bill are presented in the final column. Estimated Net Adjustments to REC Forecasts Resulting from the IRC Update Fiscal Year Total 2008 Previously Accounted Additional Impact 2009 $ -49.875 $ -12.413 $ -37.462 2010 $ -15.498 $ 17.478 $ -32.976 2011 $ -17.743 $ 3.002 $ -20.745 2012 $ -9.223 $ -2.031 $ -7.192 All amounts are in millions of dollars.
If you have any questions regarding this letter, please call me at 281-0196 or Michael Lipsman at 281-4359. Sincerely,
Amy Rehder Harris Tax Research and Program Analysis Section
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Table 1. State Fiscal Impacts from Federal Tax Legislation in 2008 Conformity with Major Provisions (Millions $) Provision
FY2009
FY2010
FY 2011
FY 2012
Worker, Retiree, and Employer Recovery Act of 2008 Waiver of pension/IRA minimum required distribution for CY09
-1.301
-6.730
0.000
0.000
Emergency Economic Stabilization Act of 2008 (plus Disaster, Energy, and Extenders) Individual Income Tax Increase AMT exemption for 2008 to $69,950/46,200 from $45,000/33,750 Increase AMT refundable credit and remove AGI limits a Option to deduct state and local sales taxes rather than income taxes Deduction for college tuition and fees Deduction for educator expenses Property tax deduction of $500/$1,000 for non-itemizers in TY 2009 Tax-free IRA distributions for 70 1/2+ up to $100,000 Refundable threshold of child tax credit at $8500
NA NA 0.000 -12.328 -0.653 NA -1.019 NA
NA NA 0.000 -11.908 -0.635 NA -0.683 NA
NA NA 0.000 0.000 0.000 NA -0.160 NA
NA NA 0.000 0.000 0.000 NA -0.066 NA
Itemized deductions for disaster loss, no AGI test or minimum Penalty-free loans from qualified retirement plans Waiver of limitation on charitable contributions for relief Look back rules for earned income Increase in charity standard mileage rate Expansion of Hope and Lifetime Learning Credits Additional personal exemption of $500 for guests Exclusion of debt cancellation from income Additional standard deduction for casualty loss Expensing of qualified disaster expenses (small business)
-2.523 -2.002 -2.726 -0.559 -0.038 NA NA -0.236 NA -0.285
0.000 -0.353 -0.550 0.000 0.000 NA NA -0.118 NA -0.854
0.000 0.177 0.376 0.000 0.000 NA NA 0.000 NA -0.626
0.000 -0.059 0.292 0.000 0.000 NA NA 0.000 NA -0.228
NA NA NA NA NA NA
NA NA NA NA NA NA
NA NA NA NA NA NA
NA NA NA NA NA NA
Extend and modify credit for residential energy efficient property Energy credit for small commercial wind property Credit for plug-in electric vehicles Extension of credit for energy efficiency improvments to existing homes Extension of energy efficient appliance credit Extension of section 48 energy tax credit Corporate Income Tax b Extend and modify federal research tax credit
NA
NA
NA
NA
Bonus depreciation for qualified disaster property Employee retention credit for Midwestern disaster Low-income housing credit for Midwestern disaster Treatment of NOL attributable to Midwestern disaster Employer credit of 30% of cost for providing lodging in disaster
-24.128 NA NA -4.756 NA
-38.035 NA NA -2.648 NA
-34.980 NA NA 0.200 NA
-16.916 NA NA 0.877 NA
Special depreciation allowance for certain reuse and recycling property Extension of renewable energy credit (wind energy) Extension of credit for energy efficient commercial buildings Extension of credit for energy efficient new homes Extension of election to expense certain refineries Biodiesel blending credit Alternative fuel vehicle refueling property credit
-0.010 NA NA NA NA NA NA
-0.021 NA NA NA NA NA NA
-0.021 NA NA NA NA NA NA
-0.017 NA NA NA NA NA NA
Heroes Earnings Assistance and Relief Tax Act of 2008 Permanent extension of election to include combat pay as earned income
-0.003
-0.004
-0.003
-0.001
Heartland, Habitat, Harvest, and Horticulture Act of 2008 Limitation on excess farming losses for certain taxpayers
0.000
0.435
0.879
0.942
NA NA
NA NA
NA NA
NA NA
NA -1.385 NA
NA -0.924 NA
NA 0.770 NA
NA 0.462 NA
Total for 2008 Legislation
-53.951
-63.028
-33.389
-14.713
Total for 2008 Legislation NOT Incorporated in IDR December REC Estimates
-37.462
-49.562
-34.159
-15.175
Housing and Economic Recovery Act of 2008 Refundable first-time homebuyer credit up to $7,500 with 15 year recapture Property tax deduction of $500/$1,000 for non-itemizers in TY 2008 Economic Stimulus Act of 2008 Recovery rebates for individuals Increase 179 expensing for small businesses c Bonus depreciation for businesses
a. It is believed nearly all Iowa itemizers choose to deduct state and local income rather than sales taxes, thus there would be no change in Iowa tax liability. b. Iowa law maintains a research activities credit, thus federal extension would not create any conformity costs. c. Iowa did not couple with this provision during the 2008 Legislative session. At that time, the estimated cost of coupling was $-18.1 million in FY 09, $-48.3 million in FY 10,$ -6.1 million in FY 11, and $14.6 million in FY 12.
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Table 2. State Fiscal Impacts from Federal Tax Legislation in 2008 Deductibility of Major Provisions (Millions $) Provision
FY2009
FY2010
FY 2011
FY 2012
Worker, Retiree, and Employer Recovery Act of 2008 Waiver of pension/IRA minimum required distribution for CY09
0.000
0.013
1.272
0.432
Emergency Economic Stabilization Act of 2008 (plus Disaster, Energy, and Extenders) Individual Income Tax Increase AMT exemption for 2008 to $69,950/46,200 from $45,000/33,750 Increase AMT refundable credit and remove AGI limits a Option to deduct state and local sales taxes rather than income taxes Deduction for college tuition and fees Deduction for educator expenses Property tax deduction of $500/$1,000 for non-itemizers in TY 2009 Tax-free IRA distributions for 70 1/2+ up to $100,000 Refundable threshold of child tax credit at $8500
0.416 0.000 0.000 0.000 0.000 0.000 0.000 NA
20.195 0.708 0.000 1.181 0.092 0.000 0.186 NA
0.000 0.099 0.000 1.212 0.117 0.801 0.125 NA
0.000 -0.076 0.000 0.273 0.029 0.000 0.029 NA
Itemized deductions for disaster loss, no AGI test or minimum Penalty-free loans from qualified retirement plans Waiver of limitation on charitable contributions for relief Look back rules for earned income Increase in charity standard mileage rate Expansion of Hope and Lifetime Learning Credits Additional personal exemption of $500 for guests Exclusion of debt cancellation from income Additional standard deduction for casualty loss Expensing of qualified disaster expenses (small business)
0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
0.657 0.366 0.499 0.735 0.097 0.765 0.086 0.043 3.642 0.052
0.000 0.043 0.101 0.000 0.000 0.359 0.014 0.014 0.930 0.156
0.000 -0.022 -0.069 0.000 0.000 0.000 0.000 0.000 0.000 0.115
Extend and modify credit for residential energy efficient property Energy credit for small commercial wind property Credit for plug-in electric vehicles Extension of credit for energy efficiency improvments to existing homes Extension of energy efficient appliance credit Extension of section 48 energy tax credit
0.000 0.000 0.000 0.000 0.000 0.000
0.021 0.000 0.000 0.004 0.081 0.111
0.042 0.001 0.001 0.244 0.037 0.090
0.051 0.001 0.008 0.081 0.017 0.088
Corporate Income Tax Extend and modify federal research tax credit
0.000
3.924
2.925
1.356
Bonus depreciation for qualified disaster property Employee retention credit for Midwestern disaster Low-income housing credit for Midwestern disaster Treatment of NOL attributable to Midwestern disaster Employer credit of 30% of cost for providing lodging in disaster
0.000 0.000 0.000 0.000 0.000
3.167 0.388 0.121 0.624 0.121
4.992 0.238 0.562 0.347 0.053
4.591 0.085 1.259 -0.026 0.004
Special depreciation allowance for certain reuse and recycling property Extension of renewable energy credit (wind energy) Extension of credit for energy efficient commercial buildings Extension of credit for energy efficient new homes Extension of election to expense certain refineries Biodiesel blending credit Alternative fuel vehicle refueling property credit
0.000 0.000 0.000 0.000 0.000 0.000 0.000
0.002 0.044 0.011 0.002 0.007 0.037 0.002
0.002 0.046 0.015 0.002 0.007 0.017 0.049
0.002 0.054 0.017 0.001 0.006 0.003 0.057
Heroes Earnings Assistance and Relief Tax Act of 2008 Permanent extension of election to include combat pay as earned income
0.000
0.005
0.006
0.004
Heartland, Habitat, Harvest, and Horticulture Act of 2008 Limitation on excess farming losses for certain taxpayers
0.000
0.000
-0.080
-0.161
Housing and Economic Recovery Act of 2008 Refundable first-time homebuyer credit up to $7,500 with 15 year recapture Property tax deduction of $500/$1,000 for non-itemizers in TY 2008
NA 0.000
NA 0.770
NA 0.000
NA 0.000
Economic Stimulus Act of 2008 Recovery rebates for individuals Increase 179 expensing for small businesses Bonus depreciation for businesses
NA 0.485 3.175
NA 0.323 8.445
NA -0.269 1.073
NA -0.162 -2.557
Total for 2008 Legislation
4.076
47.530
15.645
5.491
Total for 2008 Legislation NOT Incorporated in IDR December REC Estimates
0.000
16.586
13.413
7.984
Note: Iowa allows taxpayers to claim a deduction for federal income taxes paid in determining State tax liability. Therefore a reduction in federal taxes will generally result in an increase in a taxpayer's State tax liability. a. It is believed nearly all Iowa itemizers choose to deduct state and local income taxes rather than sales taxes leading this provision to cause no change in Federal and thus Iowa tax liability.
