The Revenue Estimating Conference (REC), which is tasked with the difficult job of projecting state revenues, held their December meeting and is estimating Iowa will collect $8.2 billion in revenue for Fiscal Year (FY) 2022. The REC also increased the current FY 2021 estimate to $7.9 billion, which is a $65 million increase from their previous projection. The REC will meet again in March 2021 and the legislature will be required to use the lower of the December or March revenue estimates in crafting the FY 2022 budget.
As the legislature prepares to reconvene on January 11, 2021 economic uncertainty remains even though Iowa’s economy is recovering from the COVID-19 triggered economic recession. It will be imperative that legislators continue practicing fiscal conservatism by limiting spending, reducing tax rates when applicable and adhering to conservative revenue estimates.
Governor Reynolds and the Republican led legislature have been following fiscal conservative principles of limiting spending and reducing tax rates. Governor Reynolds even received an “A” grade from Cato Institute’s 2020 Fiscal Policy Report Card on America’s Governors for her fiscal conservatism. During the last legislative session, the legislature kept spending levels low and passed a “status quo” budget. The legislature passed a $7.78 billion FY 2021 budget, which was only a slight increase from the previous fiscal year.
As a result of conservative budgeting practices, Iowa’s fiscal house was not only prepared for the economic emergency caused by the pandemic but remains in strong condition. Iowa’s budget has a $305 million surplus, and over $700 million in reserves. Both Governor Reynolds and the legislature have been crafting budgets that focus on the priorities of government. In addition, they have also reduced tax rates. Limiting spending along with tax rate reductions has strengthened Iowa’s economy.
Although Iowa’s economy is recovering and the unemployment rate, 3.6 percent, is the third lowest in the nation, economic uncertainty remains. “There’s no tested economic model that provides a hint as to what happens when a pandemic closes an economy, and as it opens and shuts down in parts, what the total impact is on a country. We know that we will come out of this — we’re seeing signs of that,” stated David Roederer, who chairs the REC and serves as the Director of the Iowa Department of Management.
Some of the uncertainty rests on the COVID-19 vaccines that are starting to be introduced. This is a point that Director Roederer made during the REC meeting. “So the question really is, do we need economists or do we need psychiatrists to really help us determine what is going to happen because the economics may say one thing but it’s going to get down to whether or not people feel that the pandemic is coming to an end and whether or not they feel secure enough to invest their money into more goods and services,” noted Roederer.
Nevertheless, following the principles of fiscal conservatism is essential regardless of the state of the economy. For proof, Iowa only needs to look to its neighbor, Illinois, and other states whose fiscal houses were collapsing even before the pandemic began. States such as Illinois, New York, and California are demonstrating that a state cannot tax and spend itself into prosperity.
Limiting spending is never easy as there are numerous special interests clamoring for either new or additional funding. Some of these special interests may have worthy causes, but government, just as with families across Iowa, must make the difficult decisions as to what the priorities are.
The Texas Public Policy Foundation has outlined five principles for responsible fiscal conservative policies during an economic recovery and they are applicable to all states. These five principles include:
- Passing a conservative budget
- Reducing government spending
- Reducing regulatory burdens
- Rejecting increased taxes
- Using Rainy Day fund responsibly
These are principles that Iowa policymakers should keep in mind when crafting the state budget in addition to considering policies which would aid in the economic recovery.
Following a conservative budget will also allow the legislature to consider additional tax reform. Governor Reynolds and legislative leaders have hinted at additional tax reform during the 2021 legislative session. One area of tax reform policymakers could address would be to either repeal or revise the revenue triggers currently in place. This would help guarantee that income tax rate reductions will occur as scheduled in 2023.
In 2023, as part of the 2018 tax reform law, Iowa’s income tax is scheduled to be reduced to 6.5 percent. The caveat is, for the rate reduction to occur, two stringent revenue triggers must be met. The first, state revenue must surpass $8.3 billion, and the second, requires revenue to grow at least four percent during that fiscal year. The economic impact of COVID-19 may delay the rate reduction but repealing the triggers would reduce a major roadblock to income tax relief.
By continuing to follow a policy of fiscal conservatism policymakers will be able to navigate through the economic uncertainty of the pandemic and ensure that Iowa’s fiscal house remains in strong condition. Iowa has demonstrated that conservative budgeting is the best path to follow.
