State finances to dip slightly, panel projects

DES MOINES — State revenue is projected to fall slightly — although not by as much as previously feared — during the current state budget year, a state panel said Wednesday.

And revenue will increase only marginally — by just 0.1 percent — in the next state budget year, which begins July 1, the panel said.

The latest estimates were presented Wednesday by the state’s Revenue Estimating Conference, which meets quarterly to project state revenues.

The panel’s annual December projections are used by the governor and state lawmakers to craft the next state budget. That work will begin in earnest when the 2023 session of the Iowa Legislature begins next month.

The panel estimated state revenue will be just more than $9.62 billion fiscal 2023, the current state budget year that ends June 30. That would be a 1.9 percent drop from the previous budget year, not quite as steep as the 2.7 percent drop the panel estimated in October.

And there will be minimal revenue growth in fiscal 2024, the next state budget year, which starts July 1. The panel estimated revenue will be just more than $9.63 billion, an increase of just more than $10 million — or 0.1 percent — over the current year.

That $9.63 billion projection puts the governor and state lawmakers on the path to creating the next state budget.

The slight dip in state revenue does not necessarily endanger the state budget. Gov. Kim Reynolds and state lawmakers — led by Republican majorities in both chambers of the Legislature — spent just more than $8.2 billion on the current state budget.

“There’s no question we continue to over collect from Iowans to fund the priorities that the General Assembly and the governor have identified in the past,” said Kraig Paulsen, director of the state revenue department and a member of the fiscal estimating panel, and a former Republican state legislator.

The Revenue Estimating Conference is comprised of three members: one each from the nonpartisan Legislative Services Agency, the governor’s office and an independent member. In addition to Paulsen, who serves as the governor’s representative, the panel includes Jennifer Acton with the legislative agency and David Underwood, an economist from Mason City.

Paulsen said the projected slight dip in state revenue can be primarily attributed to recent state tax reductions — most specifically, the elimination of state tax on retirement income that takes effect in 2023.

Those recent changes will continue to impact state revenue, as the number of income brackets and state income tax rates will be gradually reduced over the next four years, at the end of which all Iowa taxpayers will pay a 3.9 percent state tax on their income. The changes are projected to save taxpayers — and thus reduce state revenue — by nearly $2 billion annually.

Paulsen said he does not see cause for concern about the future trend in state revenue.

“I have no concerns about meeting the obligations the state has and meeting the priorities they have with regard to state spending,” Paulsen said.

The general fund budget still has a surplus of more than $1.1 billion in the current budget year, according to Legislative Services Agency.

Reynolds also described the latest revenue projections as evidence that state government is collecting more tax revenue than it needs to operate.

“December’s REC projections confirm that we are achieving our goal of correcting the state’s over-collection of taxpayer dollars and returning it to hardworking Iowans,” Reynolds said in a statement. “The historic tax cuts I signed into law earlier this year will begin to take effect in a few weeks, and as planned and expected, the projections show a slight dip in the state’s revenue. However, our state’s budget remains robust, and we continue to invest in key priorities to benefit all Iowans.”

Democratic leaders in the Iowa Legislature said the latest projections provide warning signs for state revenue and services.

“Every dollar Republican politicians hand over to corporations and millionaires (via tax reductions) puts Iowa families, our public schools, and our kids at risk,” state Rep. Timi-Brown Powers, the top Democrat on the Iowa House budget committee from Waterloo, said in a statement. “The Iowa House Democrats are committed to passing a balanced state budget that keeps money in the pockets of everyday Iowans.”

The Revenue Estimating Conference members said there is much uncertainty in the U.S. and Iowa economies, and that it is difficult to predict whether the economy will hit a recession. Although Paulsen said even if Iowa goes into a recession, he feels it will not be a deep recession and that the state is well equipped to handle a small downturn.

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