DES MOINES, Iowa – The Revenue Estimating Conference (REC), a panel consisting of Kraig Paulsen, the director of the Iowa Department of Management, Holly Lyons, the Fiscal Services Division Director of the Legislative Services Agency, and David Underwood, a public member of the panel, forecasted that the state’s net revenue would decrease slightly over the next two fiscal years.
Even with that decline, state revenues are projected to be higher than pre-pandemic levels by over $1.1 billion, comparing FY 2019 actual revenue with FY 2024 estimated net revenue.
The panel last met in December. Compared to December, the panel increased their projections for tax revenue and the state’s net revenue for FY 2022 for the general fund. They project tax revenue to be $10.54 billion, an increase of $191.5 million from December’s projection, and a 2.6 percent increase from the actual taxes collected in FY 2021. In addition, they predict the state’s net revenue with transfers to be $9.17 Billion at the end of FY 2022, an increase of $110.5 million compared to December’s projection and a 4.2 percent increase from the actual net revenue in FY 2021.
The projected decline in revenue is expected to take effect in FY 2023 when the recent tax reform bill begins to be implemented (the 3.9 percent flat tax for individual income tax will not go into effect by 2026).
The REC estimated $9.156 billion in net revenue for FY 2023, representing a $14.8 million drop (0.02 percent) from the FY 2022 net revenue estimate.
Compared to the revised FY 2022 level, the estimated changes include a decrease of 1.6 percent in gross personal income tax, an increase of 4.2 percent in gross sales/use tax, and a reduction of 6.3 percent in gross corporate income tax receipts. A slight drop in total tax receipts of $1.3 million.
The REC estimated that net revenue will decrease further in FY 2024. They project net receipts, including transfers, to be $8.960 billion, a decrease of 2.1 percent compared to the revised FY 2023 projection.
“General fund revenue growth on a fiscal year basis is up more than 7.8 percent so far this year, and we’re nearly three-quarters of the way through the fiscal year. The current rec estimate is for three percent annual growth. Individual income tax and sales tax are both far exceeding projections. The rub is that most of our growth last year occurred after February. So the year over a year comparisons from this point forward will likely decrease,” Lyons said during the REC meeting.
“National and Iowa employment numbers are still below the pre-pandemic peaks, but they’re making steady monthly progress slowing a bit in the last months of calendar 2021. Wage rates are higher as businesses are competing for labor. And, getting back to basics, as long as employment numbers continue to improve, tax revenue growth should remain positive,” she added.
Lyons noted that Russia’s invasion of Ukraine brings economic uncertainty.
“Conclusions regarding Iowa’s economic future are challenging to arrive at. Conditions continue to be conflicting and noisy, pandemic-driven circumstances compound the complexity, and the Russian invasion of Ukraine only exacerbates the challenge of drawing conclusions with certainty,” he said.
Paulsen said that Iowa’s economy continues to expand amidst inflationary pressures.
“Although the pace of growth has modestly slowed, demand continues to surge despite rising prices. The labor market remains tight, and companies continue to hire. Possible Federal Reserve interest rate hikes will likely not derail growth. Personal employer balance sheets are strong enough to withstand modest rate hikes. The downturn risks appear minimal over the next year, even after recognizing the supply chain labor and inflation challenges. In fact, Fiscal Year 22 and 23 continue to show strong economic growth for Iowa. Pressures impacting Fiscal Year 24 are harder to predict,” he said.
“Although too far out to draw solid conclusion, there does appear to be a greater risk of a slower economy, and in turn, weakening state revenues in 24. Although I see no reason to conclude this slowdown will cause an economic contraction,” Paulsen added.
Neither mentioned the tax reform bill as a cause for the drop in revenue.
Republican leadership said they were encouraged by the report.
“The projections released today by the REC are very encouraging and again reaffirm why we worked hard this legislative session to pass the largest bipartisan tax reform bill in the history of our state,” Gov. Kim Reynolds said in a released statement.
“Our bold tax cuts were necessary as we continue to over-collect Iowan’s hard-earned money. But with the new tax law of a flat and fair 3.9% individual tax rate by 2026, and eliminating the state income tax on retirements, among other tax reform, Iowans will see more money in their pockets and not in the hands of the government,” she added. “These new projections also reaffirm the fact that we have steady revenue entering our state, and that revenue will ensure that our key priority areas like education, public safety and mental health continue to be adequately funded.”
Iowa Senate Majority Leader Jack Whitver, R-Ankeny, was also encouraged by the projections.
“Today’s REC projections confirm that even in the midst of global economic challenges, Iowa is in a strong fiscal position. Reserve accounts are full, the taxpayer trust fund will have nearly $2 billion, and the economy is growing. The tax relief bill is sustainable, the budget is balanced, and Iowa is on the right track,” he said.
Iowa House Speaker Pat Grassley, R-Iowa, also said the projections point to a strong economy.
“The strong projections from the Revenue Estimating Committee this morning reaffirm what we already know about the strength of Iowa’s economy. Thanks to the Governor’s leadership and House Republicans’ responsible budgeting, Iowa’s economy remains strong. So strong that we were able to deliver the largest tax cut in Iowa history while continuing to fund Iowans’ priorities in the state budget. It’s a great time to be an Iowan.”
Democrats expressed the opposite sentiment.
“Today’s REC report shows the “trickle down tax cut” from Governor Kim Reynolds and GOP politicians will overwhelmingly benefit the ultrarich and big corporations, while resulting in likely future budget cuts for public schools, law enforcement agencies, & our health care system,” Iowa Senate Minority Leader Zach Wahls, D-Coralville, tweeted.