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Cedar Rapids, Iowa 52401
DES MOINES — State tax revenue in Iowa continued on a strong path in May, when net tax revenue was up nearly $402 million — a 42 percent increase — over May of 2021.
State sales, income, fuel and gambling taxes all increased, according to the state’s nonpartisan fiscal services agency.
The Gazette Des Moines Bureau talked with Robin Anderson, the state’s chief economist in the Iowa Department of Revenue, about what’s causing such healthy state finances, and how long it may last. Anderson’s answers are edited only for brevity and clarity.
Q: What has led to sales tax receipts being so healthy, including over last year?
A: I think it goes to the health of the economy and consumers’ spending. The other caveat, I would say, is certainly we have seen some inflation. And sales tax revenue is nominal. So some of the inflationary pressures might be putting some upward drift on sales tax data. I do want to emphasize, though, even before the really high inflation numbers you’ve seen over the last few months, sales tax revenue has been very strong. I think that just shows really distinctive consumer spending is in the state, and this aligns with the national-level data that we see.
Q: State income taxes are up, even though fewer Iowans are working since before the pandemic. How does that happen?
A: I think there’s a couple of things going on. Wage growth has been very strong. I think that’s showing up in the withholding data. And wage growth has been … even though jobs are not where they were prior to the pandemic, wage growth is exceeding what it was prior to the pandemic. In addition, we have healthy income pay returns, which include other income sources, including capital gains and farm income and business income. And those other income sources were very strong in tax year ’21.
Q: Will we start to see a decline in state income tax receipts with the new tax law, which will gradually reduce state income tax rates, going into effect? If so, when?
A: Certainly as tax rates go down we’re going to be seeing less income tax coming in. And I think the other thing that’s going to be affecting this is just the trajectory of the economy, and how wage growth, how capital gains income, and how business income is doing. That’s also going to matter for receipts going forward.
Q: What do the coming months look like for total state tax revenues? Will the good news continue?
A: I think right now state revenues are very healthy. Certainly the budget situation, at least for this year, is very strong. Stepping away from that, which is all good news, I think there’s a lot of uncertainty about where the U.S. economy is headed right now. And there’s a lot of debate about recession risk right now. And that’s something that we’re watching.
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