Spending decisions loom for Iowa legislators

DES MOINES — Projected state revenue in the coming budget year remains lower than current state spending — the result of state income tax reforms — although the picture got a little rosier Thursday.

At its regular meeting at the Iowa Capitol, the state’s nonpartisan Revenue Estimating Conference projected Iowa will collect just more than $8.7 billion in the next state budget year, which starts July 1.

That still is less than the $8.9 billion the state is spending in the current budget year. But it is an improvement of $67 million over the panel’s October projections.

The three-member panel is comprised of Iowa Department of Management Director Kraig Paulsen, who represents the executive branch; Jennifer Acton, of the state’s nonpartisan Legislative Services Agency, and Jeff Plagge, a former banking chief executive officer and former superintendent of the Iowa Division of Banking who represents the public.

  Buy Photo

The panel meets quarterly to assess Iowa’s finances and project future state revenues. The projections are used by state lawmakers to set the state’s budget and spending plan for government services, like education, public safety and health and human services.

“The state continues to be in a very strong financial position, in no small part because of this continued spending discipline,” Paulsen said during Thursday’s meeting. “Tax cuts are clearly what are driving the reductions in state revenue. So to be clear, but for the tax cuts, the state would be seeing revenue growth.”

The panel projects state revenue collections will net $8.726 billion in the next state budget year. The current state general fund budget is $8.91 billion. So that leaves a $184 million shortfall between what the state is spending now and what it expects to take in next fiscal year.

That gap could be closed in a few ways. Lawmakers could reduce current state spending levels, use some of the more than $2 billion in the state’s general fund budget surplus, or tap into some of the $3.7 billion in the state’s Taxpayer Relief Fund, which was created to cover any potential shortfalls as the result of state tax reductions.

The latest projections again show the impact of recent reductions to Iowa state income tax rates. Personal income tax revenue is projected to be $665 million less — a 12 percent drop — in the coming budget year, according to the projections.

The tax cuts, enacted over multiple bills and starting in 2019, gradually reduced the number of state income tax brackets and lowered rates. In 2023, there were four brackets ranging from 4.4 to 6 percent, and in 2024 there were three brackets ranging from 4.4 to 5.7 percent.

In 2025, most working Iowans will pay a flat 3.8 percent state income tax rate.

Iowa’s economy, meantime, continues to appear healthy. State sales tax revenue will increase 4.3 percent in the next budget year, the panel projected. That’s an improvement over the panel’s October projection of a 3.3 percent increase.

“Iowa’s economy continues to show resilience in the face of higher costs for goods and services,” Acton said.

Statehouse leaders comment on latest figures

Democratic legislative leaders issued statements critical of the latest state revenue projections, as they did in October.

“The (Gov. Kim) Reynolds economy is not working for most Iowans and today’s revenue projections prove it. Every week Iowans are experiencing more layoffs and rising costs while corporations make more money and get endless tax breaks,” Rep. Timi Brown-Powers, of Waterloo, the top Democrat on the Iowa House budget committee, said in a statement.

“Our work in the next session must be focused on lowering costs and helping people make ends meet, not more giveaways to the special interests and wealthy. It’s people over politics,” Brown-Powers said.

Sen. Janet Petersen, of Des Moines, the top Democrat on the Senate Budget Committee, used the latest budget projections to highlight her concerns with the state’s private school tuition assistance program, which cost the state $179 million in its second year and is expected to grow as it continues to be phased in and becomes available for more students.

Petersen called for more transparency in the program.

Statehouse Republicans expressed confidence in the state budget and its ability to withstand projected revenue reductions. Republicans have had complete control of the state lawmaking process since 2017, and thus have crafted the past seven state budgets.

“The REC confirmed Iowa remains on a fiscally sustainable path,” Senate Majority Leader Jack Whitver said in a statement. “For too long state government has been taking too much money from working Iowans. Years of historic tax cuts have reduced the amount of money confiscated from Iowans. Even with those cuts, the state budget maintains enough revenue growth to continue responsible increases in education and ensure law enforcement has the resource they need to keep us safe.”

Reynolds in a statement said the latest projections were expected and show statehouse Republicans’ “responsible, growth-oriented fiscal stewardship” and highlighted the billions of dollars in the general fund surplus, Taxpayer Relief Fund and emergence reserve accounts.

“Iowa’s conservative budgeting practices and commitment to shrinking the size and scope of government have once again put our state in a strong financial position just as our low, flat income tax rate of 3.8 percent takes effect next year for every Iowa taxpayer,” Reynolds said.

Comments: (515) 355-1300, erin.murphy@thegazette.com

Get the latest Iowa politics and government coverage each morning in the On Iowa Politics newsletter.