Following a surprise move by Democrats, the Senate unanimously passed a bill that would gradually eliminate Iowa’s inheritance tax and remove the required revenue benchmarks the state must reach before 2018 tax cuts take effect. Although Democrats initially opposed SF 576 in committee, they supported the measure on the floor, which passed 46-0 Wednesday. It now goes to the House for consideration.
Currently, the inheritance tax is assessed on inheritances of $25,000 or more bequeathed to anyone who is not a direct relative, like a grandchild, child, parent, or grandparent. The taxation rate is 5% to 15% based on who receives the inheritance, such as a distant relative, friend, religious group, secular nonprofit, etc. SF 576 would phase out the inheritance tax over three years.
The bill would also eliminate the economic “triggers” written into the tax overhaul law passed in 2018. As it stands, the state’s general fund must reach at least $8.3 billion and increase by 4% over the prior fiscal year before the tax cuts can take effect. Once those goals are reached, the individual income tax rate would drop by about 2%, to 6.5%; the state’s income tax brackets would be cut down from nine to four, and Iowans would no longer be allowed to claim federal income tax deductions. SF 576 would make the tax cuts effective beginning January 1, 2023, regardless of reaching the original benchmarks.
Governor Kim Reynolds has made eliminating the tax cut triggers one of her legislative priorities this session, which Senate Republicans support. During floor debate, Democrats said they favored the move because the state would likely hit the benchmarks in time for 2023 anyway and because the inheritance tax disproportionately affects low-income and middle-class Iowans.
The measure now goes to the House for consideration, where its fate is uncertain. House Speaker Pat Grassley (R-New Hartford) has supported keeping the triggers in place, but he has signaled he will engage in conversations on the issue as long as they take a cautious approach. He also pointed out that passing the bill might endanger federal COVID-19 relief funds, which cannot be used to “directly or indirectly” fund tax cuts or delay tax increases. Iowa is set to receive about $1.3 billion under the $1.9 trillion federal stimulus law.
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