Growing Iowa state budget prompts calls for tax cuts

A panel of budget experts delivered Christmas cheer to state government leaders Monday, reporting the Iowa economy is robust and is expected to deliver growing tax revenues — about 3 percent more this fiscal year and 1.7 percent more next year.

At the same time, the three-member Revenue Estimating Conference charged with forecasting state revenues warned that inflation, a persistent labor shortage and slow employment growth create uncertainty in economic projections. Holly Lyons, a panel member who is fiscal services director of the nonpartisan Legislative Services Agency, also cited “the unknown impact of the omicron variant and future variants of COVID-19.”

“After peaking in January 2021, the number of Iowa deaths has rebounded since June,” Lyons said. “That statistic is disheartening. The number of deaths and significant illnesses must come down for the economic picture to finally stabilize.”

According to the Iowa Department of Public Health, the number of patients hospitalized in the state last week with COVID-19 reached the highest level since Dec. 14, 2020, and the intensive care unit census is the highest in a year. Also, the department and State Hygienic Lab confirmed the first case of the omicron coronavirus variant in an Iowa resident.

Nonetheless, the panel projected slightly higher growth rates than it had in its last forecast in October, and both Republicans and Democrats called for some form of tax cuts.

Despite reservations, the panel agreed on an estimate of $9.211 billion in revenue for fiscal 2023. That would be an increase of $150 million or 1.7 percent compared to the revised fiscal 2022 estimate. The estimated changes include an increase of 1.7 percent in gross personal income tax, an increase of 3.3 percent in gross sales and use taxes, and a decrease of 0.7 percent in gross corporate income tax receipts.

Revenue collections are up $212 million, or $82 million more than the October growth estimate, Lyons said. That was the result of pent-up consumer demand and “massive government spending in the form of stimulus payments and extended unemployment benefits in addition to emergency moves by the Federal Reserve to stabilize the economy.”

Despite Lyons’ bullish projections, banker David Underwood — another panel member — cautioned that some of the numbers were “more of a guess than anything,” and called for revising tax receipts for fiscal 2023 downward by $80 million to $9.21 billion, a growth rate of 1.7 percent, to reflect uncertainty about inflation and COVID-19.

Iowa Department of Management Director Kraig Paulsen shared an optimistic long-term forecast for the Iowa economy, but also expressed concerns COVID-19 and advances in technology that might influence consumer behavior. Still, he was confident the forecast will not be revised downward when the panel meets again in March. A former GOP legislator, he advised lawmakers they could build the state budget off the December forecast rather than wait until seeing the March numbers.

Using Gov. Kim Reynolds’ spending recommendation would leave nearly $1.3 billion as an ending balance on June 31, 2022, he said.

“These are uncommitted dollars,“ Paulsen said, “or said another way, this is the over-collection that is occurring beyond what the state has budgeted to meet the needs of Iowans.”

“This over-collection of taxes is unethical and it must end,” Reynolds said in a statement after the conference. The Republican governor said she would fight to return the funds to taxpayers to make the Iowa “one of the most competitive states in the country.”

The forecast has both Republican and Democratic legislative leaders calling for tax cuts.

“This over-collection is the people of Iowa’s money, and they deserve it back,” said Iowa House Speaker Pat Grassley, R-New Hartford. “Particularly as we are facing rising levels of inflation from the Biden economy, we must ensure Iowans keep more of their hard-earned money.”

Some Republicans are calling for elimination of the state income tax, which they say will make the state more attractive for economic development.

Iowa City Democratic Sen. Joe Bolkcom countered that it is because of the president’s policies that Iowa’s fiscal position has improved.

“The latest revenue picture kicks the door down for the Legislature to finally do something about Gov. Reynolds’ growing workforce crisis,” Bolkcom said. He called for tax cuts targeted at middle- and lower-income Iowans and smaller businesses, more investment in job training and apprenticeships, paid family leave and affordable child care and housing.

“Republican economic and tax policies have created Iowa’s workforce crisis,” Bolkcom said. “Let's not make it worse. It’s time for new, bold thinking to make our economy work for hardworking, everyday Iowans.”

The recovery cited by the panel is leaving many Iowans behind, said House Minority Leader Jennifer Konfrst, D-Windsor Heights.

“Instead of more tax giveaways to the rich and special interests, Democrats believe any tax changes must be used to strengthen the middle class and address Reynolds’ workforce crisis,” she said.

Comments: (319) 398-8375; james.lynch@thegazette.com