Iowa’s future has never looked brighter. When crafting the budget, policymakers must remain focused on limiting spending so our state can continue on the path to prosperity.
The March Revenue Estimating Conference (REC) recently confirmed that revenue projections continue to be strong, demonstrating the resilience of Iowa’s economy. The REC is responsible for estimating state revenue, which is challenging when the economy is doing well, let alone during these times of national economic uncertainty.
Relying on what may prove to be conservative revenue estimates, the March REC projects the state will collect $9.75 billion in the current fiscal year, Fiscal Year 2023 (FY23). This represents a $135 million increase from the December REC estimate of $9.61 billion. For FY24, the March estimate is $9.65 billion, an increase from the December estimate of $9.62 billion. Year to year, the REC now estimates revenue will be 1 percent less in FY24 in comparison with FY23, despite significant tax cuts that are scheduled to be implemented.
Iowa code mandates the legislature to base the next year’s budget on the lower of the December or March estimates. This year, the legislature will work within December’s lower total of the $9.62 billion. A spending limit in the code limits the legislature further, to 99 percent of projected revenue.
Governor Kim Reynolds has proposed an $8.5 billion budget for FY24, an increase of appropriations from $8.2 billion in FY23. Neither the Iowa House nor Senate has released budget targets, but the FY24 budget will almost certainly be close to the governor’s proposal. As the legislature crafts the FY24 budget, continued spending restraint will be imperative.
Critics of Governor Reynolds and the Republican-led legislature took the March 2023 REC report as an opportunity to argue that lower estimates are evidence tax cuts passed last year are draining revenue from the state. This argument holds no water if for no other reason than the whole goal of tax cuts is to reduce the amount of revenue the state collects.
Kraig Paulsen — who serves as director of both the Department of Management and the Department of Revenue — points out that the state has seen “no organic negative growth,” and Iowa’s revenue and financial positions continue to be strong as a result of prudent budgeting and conservative revenue estimates. In other words, the tax cuts may be resulting in decreased projections of revenue, but Iowa’s economy remains strong and continues to be ahead of FY22.
Accordingly, Senate Majority Leader Jack Whitver argues the REC’s estimate “confirms what Senate Republicans have been saying for years…historic tax relief, pro-growth policies and conservative budgeting are the right policies for this state.”
The critics fail to acknowledge that Iowa’s budget has been in surplus for years and those surplus dollars come directly from the pockets of taxpayers. The March REC estimated the FY23 surplus to be $1.7 billion, increasing to $1.9 billion in FY24. In addition, both of Iowa’s reserve funds (the Cash Reserve Fund and the Economic Emergency Fund) are full, with a combined balance of $895 million for FY23, which is projected to grow to $962 million in FY24. Finally, the Taxpayer Relief Fund will increase its balance from $2.7 billion in FY23 to $3.5 billion in FY24.
Senator Whitver cited recent budget surpluses and the increasing size of the Taxpayer Relief Fund as further evidence fiscal conservatism is working. “With a projection of nearly $2.7 billion in the Taxpayer Relief Fund and an ending balance of more than $1.7 billion in FY 2023, Iowa is undoubtedly in the strongest financial position the state has ever been,” he said. “Despite ‘sky-is-falling’ claims…the future in Iowa has never been brighter.”
A recent poll from The Des Moines Register demonstrates Iowans favor the fiscal policies of Governor Reynolds and the legislature. A majority, 56 percent, favors the legislature continuing the reduction of income tax rates until that tax is eliminated entirely. Senator Dan Dawson, chair of the Ways & Means Committee, has introduced a measure that would do just that. Under the legislation moving through the Senate, the rate would continue to lower until reaching a flat 2.5 percent by 2028. Then, the Taxpayer Relief Fund would be utilized to gradually eliminate the tax altogether.
As the legislature works on the FY24 budget, limits on spending will be crucial. Furthermore, the fiscal conservatism of Governor Reynolds and the legislature should serve as an example for local governments across Iowa, as well.