The state of Iowa is grappling with a difficult situation in adequately funding education and other critical priorities due to projections of meager revenue growth for the next fiscal year. The problem is largely due to the state’s long-standing revenue shortfall, which has resulted from a preference for tax cuts over the past two decades. Lawmakers are facing built-in and anticipated spending increases for existing programs, which are projected to total $269.5 million, and they are anticipating a budget of over $7 billion.
The state’s revenue growth problem is being caused by the increase in business tax breaks, which is draining revenue from the state’s treasury. Business tax credits already on the books drained $178 million from the state treasury in fiscal year 2015. This amount grew by $94 million to $272 million in FY16 and is expected to remain at about that level next year. The six largest credits account for 84% of the total, and spending on business tax credits has grown 263% since 2007. Caps on individual credits and groups of credits have done little to slow the growth, and the cost of credits has far outstripped growth in general fund spending overall.
Recent measures have added greatly to the problem. The massive commercial and industrial property tax bill passed in 2013 is 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 the current fiscal year, FY16. Next year, that figure is expected to grow to $304 million. The property tax breaks are larger than the sum of all business tax credits. Moreover, the administration has enacted a rule, without legislative approval, that greatly expands a sales tax exemption for manufacturing. That will cost the general fund another $35 million next year, while depriving schools and local governments of another $13 million.
Altogether, business tax breaks will drain $611 million in revenue from the state general fund next fiscal year. This is a critical issue as the state is struggling to fund education at all levels. At the same time, those business tax breaks reveal the state’s priorities. Iowa did not need these tax breaks and certainly does not need to add to the damage to state services by enacting more.
Iowa has been right in the middle of the pack in how it taxes business for a long time. State and local taxes are less than 2% of total costs for the average corporation. The proliferation of tax incentives and business tax cuts over the past two decades has resulted in several hundred million dollars each year being cut from the state budget. This has undermined the state’s ability to support quality education, from preschool through public colleges and universities, which in the long run will have serious consequences for state economic growth and prosperity.
To sustain Iowa’s critical public services, including education, the state must rejuvenate state tax revenues by reducing or eliminating unnecessary and ineffective tax breaks and seeking new sources of revenue. Otherwise, the state will shortchange its future. A long-term solution is necessary to ensure the sustainability of Iowa’s critical public services, and this will require a change in priorities to ensure that the state is investing in its future.