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Posts tagged Iowa revenues

Rosy forecasts bring thorny budgets

Capitol-DSC_0119-7inA memo from the Legislative Services Agency (LSA) indicates a higher-than-anticipated cost of a special-interest sales-tax break primarily for manufacturers.

We could not afford it when Governor Terry Branstad attempted to implement it by rule in 2015, or when a scaled-back version passed in 2016, and we cannot afford it now.

But it appears likely that the new break is at least part of the reason sales-and-use taxes are flattening out, putting fresh pressure on the budget even after FY2017 cuts and continued reliance of state policy makers to push tax breaks that divert millions from critical services such as education.

There is great irony in this report coming as Governor Branstad was turning over the keys to Kim Reynolds, especially given this comment in the LSA piece by senior fiscal legislative analyst Jeff Robinson:

One potential explanation for the recent sales/use tax downturn is an underestimated fiscal impact of the sales/use tax exemption for manufacturing supplies and replacement parts. For proposed legislation in previous years, estimates of the impact of exempting manufacturing supplies and replacement parts from the State sales/use tax had been much higher.

As Robinson suggests, there was ample reason to think the cost would be “much higher” and that should have been taken into account in revenue estimates and crafting the FY17 budget.

Likewise, the four of us were present in the Iowa House chamber in 1983 when new Governor Branstad proposed a sales-tax increase, just a few months after bludgeoning his election opponent, Roxanne Conlin, with a “tax and spend” refrain. The new Governor inherited a budget shortfall right out of the gate, a product of overly rosy revenue projections by the Ray administration.

To be fair to Governor Ray, the farm crisis was unfolding back then, and the landscape was not necessarily as clear.

This time, the continuing revenue problem is due principally to out-of-control tax giveaways, which have accelerated long since Governor Ray left office. Just this one perk for manufacturing was expected to cost $21.3 million from the state budget.* However, the latest LSA analysis suggests, the cost to the state may be two or three times what was expected.

Odd that Governor Branstad, burned so early in his tenure by optimistic revenue estimates, would let this happen to his very own successor as she took office. Maybe he just forgot.

We did not forget.

 

* That cost figure grows to $25.6 million when including the dedicated revenue for local school infrastructure, and $29.2 million when including lost local-option tax revenue.

Posted by IPP Executive Director Mike Owen, IPP Founder David Osterberg, IPP Board President Janet Carl, and IPP Board Member Lyle Krewson. Owen was the Statehouse correspondent for the Quad-City Times and Osterberg, Carl and Krewson were state representatives from Mount Vernon, Grinnell and Urbandale, respectively — in 1983.


Connecting the dots: Tax breaks and school funding

Iowa’s revenue shortfall largely self-inflicted — education, other priorities suffer

A penchant for tax cuts over the past 20 years has left the state with a long-term revenue shortfall

Basic RGB

 

By Peter Fisher and Mike Owen, Iowa Policy Project

Iowa legislators frequently use projections of scant revenue growth to defend what has become chronic underfunding of education and other priorities. What they seldom acknowledge is that their dilemma is largely self-inflicted. A penchant for tax cuts over the past 20 years has left the state with a long-term revenue shortfall.

Indeed, the Revenue Estimating Conference in October projected that the state would take in $72 million less in FY2017 than it had projected in March. Adding $33 million to the cost of Medicaid privatization announced last month leaves the state with $100 million less for current obligations than lawmakers expected when they approved a budget offering schools only a 2.25 percent increase in per-pupil spending (Supplemental State Aid, or SSA). Over the last seven years, SSA has averaged below 2 percent. These trends are unlikely to improve for schools without large cuts elsewhere in the budget — or addressing the elephant in the room: rampant spending on business subsidies.

Iowa's growing spending on business tax credits, FY07-FY21, actual and projected

Business tax credits create part of the problemBasic RGB

Why is revenue growth a problem when Iowa has recovered better than most states from the Great Recession? Answers can be found in the growth in business tax breaks.

Business tax credits drained $200 million from the state treasury in fiscal year 2015, grew to $232 million in FY16, and are expected to cost $275 million this year. The six largest credits (or groups of credits) account for 87 percent of the total (see table).

Spending on business tax credits has grown 267 percent since 2007. Caps on individual credits and groups of credits have done little to slow growth. The cost of credits has far outstripped growth in general fund spending overall.

New tax breaks have worsened the problem

Recent measures have added greatly to the problem. The massive commercial and industrial property tax bill passed in 2013 was responsible for a $268 million cut in funds that otherwise would have been available to adequately fund education, natural resource programs, and other priorities in FY16. The impact in the current year was projected at $304 million.[1] The property tax breaks are larger than the sum of all business tax credits.

Assuming the property tax estimate holds, the combined cost of those business tax breaks identified above will drain about $579 million in revenue from the state general fund this fiscal year. At a time when the state is struggling to fund education at all levels, those business tax breaks take on added importance. And they tell us something about the state’s priorities.

Iowa business taxes are already quite competitive

Iowa has been right in the middle of the pack in how it taxes business for a long time. The most recent study of state and local taxes on business as a percent of state GDP by Ernst and Young and the Council on State Taxation shows that Iowa taxes business at 4.5 percent of GDP, just below the national average.[2]  A study by Anderson Economic Group in 2015 found Iowa’s effective tax rate on businesses to be 8.7 percent of profits, which placed it 32nd among the states, and again below the national average.[3]

State and local taxes have little effect on business location decisions

State and local taxes are less than 2 percent of total costs for the average corporation.  As a result, even large cuts in state taxes are unlikely to have an effect on the investment and location decisions of businesses, which are driven by more significant factors such as labor, transportation, and energy costs, and access to markets and suppliers. 

Tax breaks erode support for public investments in our future

The proliferation of tax incentives and business tax cuts over the past two decades has resulted in several hundred million dollars each year cut from the state budget. This has undermined the state’s ability to support quality education, from preschool through public colleges and universities. This poses serious consequences for state economic growth and prosperity.




[1] Legislative Services Agency, Fiscal Services Division. Summary of FY2017 Budget and Department Requests. December 2015, pp. 17 and 55. Includes the effect of SF 295 on state school aid as originally estimated.
[2] Ernst and Young and the Council on State Taxation, Total state and local business taxes: State-by-state estimates for fiscal year 2014. http://www.cost.org/Page.aspx?id=69654

[3] Anderson Economic Group, 2015 State Business Tax Burden Rankingshttp://www.andersoneconomicgroup.com/Portals/0/AEG%20Tax%20Burden%20Study_2015.pdf

 

Peter Fisher is research director and Mike Owen is executive director of the Iowa Policy Project (IPP) in Iowa City. IPP and another nonpartisan, nonprofit organization in Des Moines, the Child & Family Policy Center, provide reports and analysis as the Iowa Fiscal Partnership. Find reports on state budget and tax issues at www.iowafiscal.org. Contacts: pfisher@iowapolicyproject.org and mikeowen@iowapolicyproject.org.

Sensible context on school aid growth

Posted March 29th, 2016 to Blog

There are many ways to measure Iowa’s lagging commitment to public schools. One is a comparison of growth in school aid to growth in state revenues.

As K-12 schools are a significant share of the state budget, it seems sensible that we would expect at least similar numbers of growth in one vs. the other.

Basic RGBThat is not the case.

While not a perfect comparison — there are moving parts with both figures — you can get an idea of the general trend in the accompanying graph. Net General Fund revenues have been coming in with average yearly increases around 4 percent,* while the key school-aid number, for Supplemental State Aid, has averaged about half that.**

The numbers below are taken from the latest Revenue Estimating Conference report, available here: https://dom.iowa.gov/sites/default/files/documents/2016/03/rec-projections-2016-03-16.pdf

  • The actual ending balance for FY2015 (the budget year ending last June 1) showed a net over-the-year revenue change from FY2014 of 5.1 percent. For that same period, schools had 4 percent Supplemental State Aid — the only year that high since FY2010.
  • For the current year, the most recent official revenue estimate is for a 3.3 percent state revenue increase, while schools are operating on budgets reflecting 1.25 percent per-pupil growth.
  • For FY2017, the estimate is for a 4.4 percent state revenue increase, and the deal just hatched at the Statehouse — 13 months late — is for schools to see 2.25 percent per-pupil growth.
  • For FY2018, for budgets to be approved a year from now, the state is expecting 4.1 percent revenue growth. The school aid number for FY2018 by law was to have been set a month ago so school districts could properly plan their budgets when enrollment counts are set this fall, and to negotiate staff contracts without big uncertainties. That number has not been set and apparently will not be during this legislative session, as neither the House nor the Governor is interested.

Understand, the revenue growth number is held artificially low by the growing and incessant demand for business tax breaks that undermine revenues. So the net revenue number would be much higher if legislators wanted it. Instead, they continue to give away hundreds of millions of dollars before they even reach the state treasury.

If the Legislature were to curtail business tax credits even slightly, plenty of money would be available to properly fund education and other actual public priorities that are the traditional and best-focused business of state government.

Alas, that is not the political world in which we live.

*The average growth for general fund revenues includes both actual results for FY11 through FY15, as well as projections by the Revenue Estimating Conference for FY16 and FY17.
**Supplemental State Aid — which is a percentage for per-pupil cost growth that districts must use in building an enrollment-based budget — includes the recent deal approved by the Senate and House and expected to be signed by Governor Branstad.
Owen-2013-57Posted by Mike Owen, Executive Director of the Iowa Policy Project
mikeowen@iowapolicyproject.org
Mike Owen is a former journalist in Iowa and Pennsylvania. He covered state government for the Quad-City Times from 1980-85 and was editor and co-publisher of the West Branch Times from 1993-2001. He is serving his third term on the West Branch Board of Education, and is a member of the Professional Advisory Board of the University of Iowa School of Journalism and Mass Communications.