GOP priorities of lowering taxes, increasing school choice at risk in Iowa

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DES MOINES — It took three patches totaling more than $260 million in cutting spending and taking out IOUs, but the books on the state budget year that ended June 30 finally were closed last week.

Yet more difficulties lurk ahead that are likely to cause lawmakers to rethink how and whether they approach priorities for them like reducing taxes and increasing ways for parents to choose private or religious schools with public help.

When lawmakers return to the Capitol in January for the next legislative session, they will work on the budget that begins July 1, 2018 — and already start in the hole. The state must pay back $111 million to reserve accounts.

That puts the budget behind the 8-ball from the start, and will create significant hurdles for lawmakers who hope to increase funding for short-staffed state agencies, public education and water quality initiatives as well as pay for GOP priorities like income tax overhaul and school choice programs.

“I believe we’re going to have challenges” for the next budget year, David Roederer, the budget director for Gov. Kim Reynolds, told reporters last Wednesday.

During the fiscal 2017 budget year that ended June 30, less money than expected came into the state’s accounts. Because of the initial estimates, lawmakers and the governor had planned to spend more — as it turned out — than they actually could afford.

In order to balance the budget as required by state law, they made $118 million in spending cuts and borrowed another $144 million from the state’s reserve accounts.

Lawmakers will be watching trends in hopes of avoiding a repeat.

The state budget’s future will be cloudy until next month, when the nonpartisan panel responsible for estimating future revenues is scheduled to meet and publish its financial forecast. The panel will meet again in December and, if necessary, revise its estimates.

That December estimate will be used by legislators to draft the new budget. But before writing a single item into t, they will start with the need to repay $111 million of the total borrowed now to make ends meet.

“I’m preparing for a challenging budget year,” said Sen. Charles Schneider, R-West Des Moines, who heads the Iowa Senate’s budget committee.

Schneider added, however, he is hopeful revenues will remain steady and perhaps even increase beyond expectations. He is hoping, for example, that a federal tax overhaul, if passed, would result in additional state revenue.

Reynolds said she expects to recommend state agencies plan for a status quo budget — no increases but no reductions — and she and her staff will continue to monitor revenues as they come in.

Reynolds said she would do what she can to spur economic growth.

“We’ll have the departments come in with a status quo budget, and then we’ll take a look at the revenues that we have to put our budget together with in December,” she said. “In the meantime, what I’m doing is looking for ways that we can grow the economy, and that means creating a competitive business environment.”

If the next budget turns out be another tight one, Reynolds and lawmakers will face significant challenges in paying for basic services that Iowans expect, but also in finding money for their new initiatives.

Primary among the latter is tax reform, a top priority for Republicans who in the 2016 elections gained lawmaking control at the Capitol for the first time in two decades.

Republican lawmakers strongly crave tax reform that includes lowered rates, but such action typically comes with a hefty price tag because it reduces the amount of revenue coming in.

Republican leaders acknowledged passing tax reform during the 2018 legislative session could prove a tall order. However, they remain hopeful they can pass at least something.

Doug Gross, who was former Gov. Terry Branstad’s chief of staff in the 1980s and the Republican gubernatorial candidate in 2002, put it more bluntly:

“Next to impossible,” Gross said. “Tax reform costs money, and when you don’t have any money, it’s hard to pay for it. ... You might tinker, but you won’t do reform without money.”

Schneider is not yet ready to give up on tax reform and said Republican senators are working on a plan — but he acknowledged passing anything with a high cost will prove difficult.

Schneider said other states have passed tax reform measures that do not kick in until the state budget is sufficiently healthy, and that could be a model for Iowa next year. For example, he said an overhaul package could lower income tax rates by a certain percentage if the state’s general fund revenue grows a certain percentage.

“I think we’ll be able to do something, I just don’t know how significant it will be,” he said.

The recent need for budget adjustments, especially midstream, may lead Republican leaders in to be stingier with state spending.

State law forbids spending more than 99 percent of the money available. Most years, state spending is set at or near that level.

But key Republican lawmakers said they think it may be more prudent to set spending levels slightly lower in case revenues do not match expectations.

“I think that definitely needs to be a part of our conversation right now,” said Rep. Pat Grassley, R-New Hartford, who leads the Iowa House’s budget committee. “From my perspective, I think it is something that we definitely have to entertain, maybe being a little more conservative with our budget. ... We need to be prepared to spend less if this trend continues.”

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