Iowa Budget Dilemma for 2014

Iowa lawmakers must recognize the long-term impact of tax cuts on spending choices. Past choices will force future legislatures to lower investments on critical services on which economic growth depends.

IFP Backgrounder

Iowa Budget Dilemma for 2014

Setting a Sustainable Course Against a Tide of Giveaways

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Iowa’s 2014 legislative session opens with a budget dilemma: how to set a sustainable course for the future while dealing with the consequences of new tax cuts and other decisions in 2013.

The state started off FY2013 with a surplus of almost a billion dollars and lawmakers responded with moderate gains for the middle class. They doubled the state’s Earned Income Tax Credit for hardworking but low paid Iowa families, expanded health care coverage, assured no tuition increases at state universities, increased funding marginally for environmental quality, expanded funding for K-12 education, and restored some funding for other essential services that had been cut back.

However, these gains are all imperiled by one of the biggest tax giveaways in the state’s history — the property tax cuts enacted in that same 2013 legislative session — and a decision to give away millions of the surplus in a regressive set of smaller tax credits.

Revenue is expected to grow in FY2015 by 4.5 percent over FY2014 as the Iowa economy continues to rebound from the recession. Even with this level of growth, however, revenues will not be sufficient to cover estimated spending needed just to maintain services and keep commitments. As a result, the end-of-year surplus is expected to shrink by over $230 million.  Built-in and anticipated expenditures and the state foundation school aid will require most of the estimated revenue increase.[1] Then, when the $128.7 million cost of the property tax bill is included, estimated net appropriations of $7.07 billion will exceed estimated receipts ($6.98 billion) by $88.1 million. Funding that shortfall will require dipping into the remaining dollars from the FY2014 surplus.[2]

Figure 1. Dipping into Current Year Surplus

Figure 1 - illustration of need to dip into reserves to cover new costs 

The property tax cuts will continue to eat into revenue for years to come, shrinking future surpluses and eliminating money that could have been used to fund new initiatives or restore past budget cuts. These cuts are estimated to increase each year and cost the state $3.1 billion over the 10 years ending in FY2024. Dipping into the surplus to fund annual appropriations is not sustainable in the long term — at some point the surplus will be gone. Any slowdown or recession will wipe it out if state policy does not, and the increasing cost of the tax cuts will ensure that the state is in a weaker position to weather such a slowdown or recession without yet another round of harmful cuts in state services.[3]

Table 1. Property Tax Law Costs Rise for State

It’s not just the state budget that will be affected. Since the legislation did not absorb all the cost of the property tax cuts in the state budget, local governments will lose $741 million over 10 years. This will put strain on public services like fire and police protection, local libraries, parks, hospitals, elementary and high schools, and streets and public transit.

In addition to the property tax cuts, several other tax changes already in place for this year and next will have an impact on services. One is that many business tax credits have been modified, with caps raised to significantly increase potential spending through the tax code. These changes will cost the state nearly $475 million by FY 2024.

Another major change was the creation of the Taxpayers Trust Fund income tax credit, which will commit funds from the Taxpayers Trust Fund for the foreseeable future. For those who qualify, the maximum credit in FY2014 (2013 tax returns) will be $54 and $43 in FY2015. The cost to the treasury in the current year is over $90 million, for a tax credit that only returns income taxes — ignoring those who are too poor to pay income tax but do pay significant shares of their income in sales and excise taxes.

In future tax years, a balance in the Taxpayers Trust Fund in excess of $30 million will trigger the availability of tax credits in the next year.  The money in this fund comes from the previous years’ surpluses that otherwise would have been available to support general fund services or, potentially, to build up a stronger rainy day fund.

All of these multiyear commitments will continue to deplete any future surpluses and create problems in future years to sustain essential services. Even if the state maintains strong revenues and modest spending growth, vital programs and services will likely continue to be underfunded. Iowa Workforce Development has already closed 36 out of 55 field offices and only has enough money for one full-time wage theft investigator; wage theft costs the state hundreds of millions of dollars a year in lost wages and tax revenue. The Iowa State Patrol is at its lowest staffing level in 40 years. Over the last decade funding per student at the community colleges is down 12 percent and 25 percent for the Regents.[4] Over an extended period, due to two state budget crises in the last decade, K-12 schools have had their per-pupil spending held below actual cost increases, which over time compounds the underfunding of public education.

Iowa lawmakers must recognize the long-term impact of tax cuts on spending choices. Past choices will force future legislatures to lower investments on critical services on which economic growth depends.

[1] “FY 2015 General Fund Appropriations Funded/Budgeted at or above 100% of the FY 2014 Level,” LSA, Fiscal Division.
[2]“Projected Condition of the General Fund Budget,” LSA, December 12, 2013.
[3] “SF 295 Property Tax Changes,” LSA, Fiscal Division

[4] Authors’ analysis of Iowa College and University Enrollment Reports and LSA General Fund Appropriations.