Independent Analysis and Information on Iowa Tax and Budget Issues

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A Good Time to Get Good Information
Updated Revenue Estimate, Fresh Look at Sources, Needed for Budget
Backgrounder (3-pg PDF) July 31, 2009
News release (1-pg PDF)

Getting a Grip on Revenues

Deteriorating Iowa Tax Revenues and the 2010 State Budget

A dramatically deteriorating revenue situation for Iowa demands a review, sooner rather than later, to help policy makers assure that adjustments during the current budget year protect services needed during a recession. Governor Culver and state legislators need an up-to-date forecast before the next scheduled projections in October, so they can make budget decisions with the best information available.

In March 2009, the Revenue Estimating Conference (REC) projected net general fund receipts for both the 2009 and 2010 Iowa fiscal years. At that time, the REC lowered its December 2008 general fund receipt projections for 2009 by 2.2 percent and for 2010 by 4.5 percent (See Table 1). The December projections themselves were lower than those made in October 2008, reflecting a worsening economy.

Table 1. Recent Iowa Revenue Projections on Decline:
Net General Fund Receipts (Millions of Dollars)

Source: Revenue Estimating Conference Reports from the Legislative Services Agency web page.

 

As required by law, the Governor and General Assembly enacted the 2010 state budget based upon REC revenue projections, also drawing upon funding through the American Recovery and Reinvestment Act (ARRA).

The REC bases its projections, in part, on an analysis of general fund net tax receipts, which are reported monthly by the Iowa Department of Revenue. The most recent projections (in March) drew upon revenue reports through February. Since then, however, four additional Department of Revenue reports have shown a continued decline in state revenue (See Table 2).

As Table 2 shows, the October REC projections of very slow growth in state general fund receipts for FY2009 and FY2010 reflected very small growth in revenues over the previous three-months’ reporting and anticipated some further downturns. The REC’s downward revision in December reflected a flattening in revenues over the subsequent two months between the reports. The REC’s further downward revision in March reflected a significant decline in revenues over the subsequent three-month period. Over that period, revenues were off by 6.7 percent over the same months for the prior fiscal year.

Since the March REC, the erosion of state revenues has accelerated. From March through June, revenues were off by 13.8 percent over the same months in the prior fiscal year. This resulted in a decline over the full fiscal year of 5.8 percent.

This double-digit decline in state revenues over this most recent period has implications for the state’s FY2009 budget and its ending year balance, when the state closes its books on the FY2009 budget in September. Clearly, the overall decline in receipts of $335 million over the 2009 year ($5,418.8 million for 2009 compared with $5,725.7 million for 2008) was greater than the projections of the March REC of a $158 million difference in net general fund receipts over the same period ($5,861.5 estimated in 2009 compared with $6,019.6 actual in 2008). Transfers may be necessary to close the books on the FY2009 budget, which will likely impact Iowa’s cash reserves and its currently uncommitted ARRA funding through the fiscal stabilization and TANF matching funds.

The major issue, however, relates to future fiscal years. If revenues continue to decline, the REC’s March projection for FY2010 will need to be reviewed. If the current pattern of tax receipts continues, the FY2010 budget could be substantially out of balance.

Historically, the REC has met three times a year — in September or October to provide a framework for developing the state budget, in December to set the revenue estimate that the Governor and General Assembly must use in developing a budget for the subsequent fiscal year, and in March to consider revisions to the December estimate. If the REC lowers the estimate in March, the Governor is required to submit a revised budget to the General Assembly, and the General Assembly is required to use the lower estimate for developing next year's budget.

In 2000 and 2003, however, the REC met a fourth time, in August. Such action is warranted again this year. If there is need to revise the 2010 budget, it is preferable to make revisions earlier rather than later in the year, so any cuts can be accommodated over the full budget year. The Governor and the General Assembly could request that the REC meet no later than the end of August to provide an update of its March projections. This would enable both the executive and legislative branches the maximum time to explore options for addressing any developing budget shortfalls in the 2010 budget.

Both the revenue and expenditure sides of the state budget should be subject to review. Additional cuts in state expenditures almost surely will result in layoffs and exacerbate Iowa’s recession and unemployment levels, which have continued to rise. Cuts to essential services will leave additional burdens for Iowans who are already struggling to get by. The Governor and the General Assembly made effective use of fiscal stabilization and Federal Medical Assistance Percentage (FMAP) funding available to Iowa through the ARRA to avert making drastic cuts in the 2010 budget, but further action may now be needed.

Iowa is not alone in experiencing a major state budget deficit. According to the Center on Budget and Policy Priorities (CBPP), 48 of the 50 states have deficits and many of these are continuing to grow. Increasingly, states are looking at their tax codes to address part of the deficit and have taken actions to raise revenues through changes in personal income taxes (11 states), sales taxes (12 states), business taxes (11 states), and tobacco and alcohol excise taxes (15 states). CBPP’s analysis also showed that states that raised taxes during the 2001-04 recession did not experience lower economic growth rates over the 2004-07 period than states that did not. Some states that did not raise taxes (or that cut them) during that period, including Iowa, subsequently saw slower-than-average economic recovery. [1]

Budgets are a two-sided ledger of revenues and expenditures. No magic answer to Iowa’s budget challenges will be found in only one side of that sheet if a balanced budget also means a balanced approach to lawmakers’ responsibilities to identify needs and to pay for them. Iowa’s policy makers and the public can better address this challenge with sound information, and that starts with an updated forecast from the REC.

[1] Johnson, Nicholas, Andrew Nicholas and Steven Pennington. (July 2009). Tax measures help balance state budgets: A common and reasonable response to shortfalls. Center on Budget and Policy Priorities: Washington, D.C.


Table 2. Sinking Trends in FY2009 in Net General Fund Tax Receipts
FY2009 vs. FY2008 by Month (Millions of Dollars)

Source: Monthly Net Tax Receipts Report from the Legislative Services Agency web page.
 
A joint effort of the Iowa Policy Project and the Child & Family Policy Center (logos).