More tax cuts? New state revenue numbers show Iowa will likely see another budget surplus

Iowa will likely see another large budget surplus for a second straight year, but what lawmakers will do with it is not clear.

However, Republicans who control the Iowa Legislature used an over $1.2 billion budget surplus for the 2021 fiscal year — a record high — and a $2 billion Taxpayer Relief Fund as the basis to pass another tax cut package earlier this year.

Bettendorf Republican state Rep. Gary Mohr, who chairs the budget-writing House Appropriations Committee, didn’t rule out the possibility of further tax cuts next year.

“There are areas we want to continue to increase spending on, such as education,” Mohr said. “And if we can do that next fiscal year, we want to do that. But, again, if there’s additional moneys beyond what we feel is a reasonable for the state for next fiscal year, yes, we would love to reduce taxes again if the economy at the time warrants.”

Iowa brought in more money than expected last fiscal year, fueled by higher wages, farm income, strong job growth and federal stimulus spending. Then state tax receipts surpassed $9 billion in the budget year that just ended, an increase of more than 12 percent over the previous year, according to a new state report.

Net revenue increased nearly $1 billion from the prior fiscal year, driven largely by individual income and sales tax growth.

Net individual income tax increased 16.6 percent, or by over $664 million, while sales tax receipts were up 8.3 percent, or over $225 million, according to a June memo from the Legislative Services Agency, the nonpartisan support agency of the Legislature.

The state’s 2022 fiscal year ended June 30; however, Iowa won’t officially close its books for the budget year until September as it continues to pay out and receives outstanding obligations, including tax refunds and payments.

But based on June numbers, state budget analysts expect excess revenue above what was projected, making for a second straight year of double-digit increases.

The state ended the 2021 fiscal year with an extra $1.24 billion, the biggest surplus in Iowa history. State revenue increased by about 14 percent compared to with previous year.

“Fiscal year 2022, while off the record experienced last year, is quite remarkable in both dollar and percentage growth,” said Jeff Robinson, senior fiscal analyst for the Legislative Services Agency. “We don’t get this kind of growth, particular two years in a row, ever.”

Both he and Robin Anderson, the state’s chief economist in the Iowa Department of Revenue, said the latest revenue numbers reflect the health of the Iowa and U.S. economies and strong consumer spending fueled by a massive federal stimulus, strong job growth and higher wages.

“The strength in (tax) receipts we saw this year reflect … the sharp V-shaped recovery the Iowa and U.S. economy had from the pandemic,” Anderson said.

Iowa added 34,900 jobs in May compared with a year ago, according to Iowa Workforce Development. In all, Iowa recovered 151,100 of the 169,800 jobs shed since the start of the pandemic in March 2020. The state’s 2.7 percent unemployment rate for May was almost back to its pre-pandemic level. But Iowa still is 18,700 jobs shy of where it stood then.

While Iowa’s state revenues are healthier than fiscal experts previously estimated — for the moment — a state panel in March projected reductions over next two fiscal years.

Next fiscal year, which began July 1, state revenue is expected to decrease by 0.2 percent. The following year, the Revenue Estimating Conference projects state revenue will decrease by 2.1 percent to $8.96 billion, once the new state income tax cuts — which include a “flat tax” of 3.9 percent — take effect.

However, so long as revenues continue to grow at their historical average of roughly 3 or 4 percent, no state department or agency will be forced to cut its budget, according to state budget analysts.

While it’s unlikely the state will see 12 or 8 percent growth again next year, there are no signs yet of a slowing economy, Robinson said, despite high inflation, rising interest rates and talks of a possible recession.

“There’s a lot of money out there from the federal stimulus that people may spend,” he said. “… It’s positive news. If the economy is slowing, it hasn’t shown up yet.”

Anderson, the chief economist, said she’ll be closely monitoring the state’s sales tax receipts.

Mohr and Iowa Gov. Kim Reynolds celebrated the latest projections and touted Republicans’ stewardship of the state’s finances.

"I am proud of our fiscal and conservative budgeting practices that have led us to this point,“ Reynolds said in a statement. ”While at the same time, we continue to make record investments in key priorities such as mental health, public safety, and education — which alone makes up 56 percent of the overall state budget. This again reaffirms that our bold and historic tax cuts were the right policy and that we are over-collecting from hard working Iowans. I believe Iowans should decide how best to spend their money, not the government."

Iowa Democrats argue the tax cuts will overwhelmingly benefit the wealthiest Iowans and corporations when Iowans grapple to access quality, affordable health care and public schools struggle with increasing costs, staffing shortages and rising tuition at a time when the state can afford to do more.

“The idea we should be using our tax dollars to pay for a tax cut for the ultra rich is just a great example of how out of touch Republicans are and how much they cater to their ultrarich donors,” Iowa Senate Democratic Leader Zach Wahls of Coralville told reporters Thursday.

Wahls, too, argued Reynolds and Republican lawmakers have failed to address the root causes of the state’s workforce shortage, and that talented workers are leaving the state over an unwelcome and divisive brand of politics and an unwillingness to invest in the things that will attract and keep families in Iowa, such as education.

Republicans passed a $8.2 billion budget for this fiscal year, a small increase over the previous $8.1 billion state budget. Lawmakers also approved a 2.5 percent increase in state funding for K-12 schools, equating to roughly $172 million in new general state funding for the upcoming school year. Democrats has called for twice as much of an increase.

Comments: (319) 398-8499; tom.barton@thegazette.com