DES MOINES — Changes in federal and state tax policies as well as overall economic strength prompted state officials Tuesday to bump up their growth projections for Iowa tax collections to 4.9 percent this fiscal year, but then scale back their estimate to a 1.7 percent increase in fiscal 2020.
The three-member Revenue Estimating Conference added $101.7 million to its current-year projection of $7.742 billion, building expectations the state will collect a total of an extra $358.2 million over the previous year by June 30, 2019.
The panel’s estimated increase was fueled in part by a windfall that’s due to federal tax cuts translating into higher state revenue. Iowans will have less to deduct from their federal taxes when calculating what they owe the state.
However, when new state tax changes adopted last session by the GOP-controlled Legislature and signed by Gov. Kim Reynolds kick in Jan. 1, state officials project overall receipts will take in $93.4 million less yet this fiscal year, and fiscal 2020 projections call for $262.9 million to be erased from the state’s revenue stream.
“Near term, the economic outlook is bright, but there is concern as to whether it is sustainable,” said Holly Lyons, an official with the nonpartisan Legislative Services Agency who serves as a panel member.
Unemployment is low and both business investments and corporate earnings are up, she said, adding that “while there are no real storm clouds ahead,” concerns over trade, sluggish farm prices, rising energy costs, a shortage of skilled Iowa workers and potential “unintended or unanticipated consequences” of tax changes continue to inject uncertainty into the economic outlook.
David Roederer, the panel’s chairman who also directs the Iowa Department of Management, said Iowa’s indicators are “very positive” with businesses reporting the strongest economy they’ve seen in 10 years and employment, wages and personal income numbers “heading in the right direction.”
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But he noted there still are concerns facing agriculture and other variables that could impact state tax collections.
“The economy nationwide is improving and we are seeing the same thing here in Iowa,” Roeder told reporters. “But we also want to be cautious.”
According to figures discussed Tuesday, state government ended fiscal 2018 on June 30 with revenue of about $7.38 billion — an increase of $298.4 million that topped the growth estimate.
Forecasters say they expect tax collections to grow to about $7.74 billion by June 30, 2019, but the growth rate will slow in fiscal 2020 as tax cuts hold collections to about $7.87 billion.
According to state estimates, the tax legislation that lowered state income tax rates and increased some state sales and corporate income tax collections will have a net impact of reducing the state revenue stream by $262.9 million in fiscal 2020, $331.4 million in fiscal 2021, $394.1 million in fiscal 2020 and $438.9 million in fiscal 2023.
Gov. Kim Reynolds said Tuesday’s revenue growth estimates were “reflective of an economy that’s growing” and indications that Iowans are be allowed to keep more of their money.
“I think it shows we’re moving in the right direction,” said Reynolds, who noted Iowa has had three straight quarters of wage growth and she’s hearing on the campaign trail that “business has never been better.”
However, panel member David Underwood, a business consultant from Clear Lake, said businesses are being impeded by a lack of available labor; wage increases for Iowa workers have been modest; and many companies already are at “maximum” overtime to maintain production.
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Rep. Chris Hall, D-Sioux City, the ranking Iowa House Appropriations Committee member who attended the meeting, expressed similar concerns and worried a 1.7 percent growth rate could mean “very hard decisions” when the Legislature convenes next year to start assembling a fiscal 2020 state budget.
“I think the overall take-away here is that fiscal year 2020 revenue is really in peril,” Hall told reporters. “The Republican-passed tax cut of last year is something that’s taken a huge number out of the state’s revenue stream. When you look at fiscal year 2020, the lion’s share of those dollars are going to corporations and top income earners, so those are dollars that are being taken out of state services and a growth level left at a perilous 1.7 percent.”
Members of the state Revenue Estimating Conference will meet in December and the estimates developed then will become official projections used by the governor in preparing budget recommendations that will be the starting point for lawmakers assembling a budget plan for fiscal years 2020 and 2021. The panel will meet again in March to reassess the estimates.
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