Iowa along with several other states, are confronting budget gaps. The reason for this is not that revenues are declining, but rather, revenues are not rising as projected by the Revenue Estimating Conference. Iowa’s budget situation has raised considerable debate on how to resolve this situation. Iowa needs economic growth that will not only create more economic opportunities for Iowans, but also bring more stability to state finances. To achieve this goal Iowa policymakers must enact tax reform and reform state spending by following priority-based budgeting.
The purpose of priority-based budgeting is to focus spending on the essential services of government. State programs must also be reviewed on a regular basis to determine if they are actually achieving results. This is a more responsible way to budget because it brings more accountability to the taxpayers who must finance state government. The State of Washington saved taxpayers an estimated $2 billion using priority-based budgeting.
Iowa policymakers must consider tax reform. The issue of tax reform was sidelined during the 2017 Legislative session, but Legislators cannot delay tax reform any longer. Iowa policymakers should not be scared away from tax reform because of the lower than projected revenues. As an example, North Carolina in 2011-2012 faced a $3 billion budget gap and in response to this budget crisis they not only reformed the budget by controlling spending, but also enacted major tax reform.
The North Carolina tax-reform measure reduced the state’s corporate tax rate, abolished the estate tax, and created a flat income tax. The corporate tax rate in North Carolina went from 6.9 percent to 4 percent, and it will eventually fall to 3 percent in 2017. In addition, the personal income tax rate was 7.75 percent and is scheduled to be lowered to 5.499 percent in 2017. The North Carolina Legislature is currently considering further tax reform by lowering the individual income tax to 5.25 percent.
Because of the budget and tax reforms North Carolina’s economy is growing, they have maintained a Aaa bond rating, and the budget is experiencing a $580 million surplus. Tax reform along with fiscal prudence is resulting in the economic growth in North Carolina. Policymakers must remember that tax cuts do not automatically pay for themselves and spending must be controlled to avoid budget deficits. Nevertheless, tax cuts do provide a fiscal stimulus and can create additional revenues.
Iowa policymakers can learn from North Carolina’s example. Priority-based budgeting along with prudent tax reform will create an opportunity for Iowa’s economy to grow and keep the vital functions of the state government funded. States that are following limited government policies of low tax rates and prudent fiscal policies are doing the best economically.
• John Hendrickson is a Research Analyst with Public Interest Institute, a public policy think tank based in Muscatine