Iowa revenue expected to decline in coming years
Iowa’s revenue will decline over the next few fiscal years, state experts predicted Thursday.
The Revenue Estimation Conference (REC) meets several times a year to forecast how much money Iowa will raise. The REC called its first meeting on Thursday after Governor Kim Reynolds signed a major income and corporate tax cut.
The REC projects the state will generate net revenue of $9.17 billion in fiscal year 2022, which ends in June. This would be a 4.2% increase over the previous year.
But state revenues are expected to decline in coming years, in part due to the entry into force of the tax cut. REC members also highlighted a wide range of economic uncertainties facing Iowa and the United States, including the war in Ukraine, labor and supply chain shortages, and the inflation.
“Conclusions about Iowa’s economic future are difficult to draw,” said Kraig Paulsen, director of the Iowa Department of Revenue. “Conditions continue to be confrontational and noisy.”
According to the latest projections, Iowa will bring in $9.16 billion in fiscal year 2023, a decline of 0.2%. Paulsen estimated a decrease of $236 million due to tax cuts in 2023, when the first provisions of the bill take effect.
Fiscal 2024 will see an even bigger drop, with projected net revenue of $8.96 billion, down 2.1%. Paulsen said $561 million of that decrease would come from tax cuts.
Although state revenues will not continue to increase over the next few years, they are still expected to be higher than pre-pandemic totals. In fiscal year 2019, Iowa’s net revenue was $7.86 billion, more than $1 billion lower than projections for fiscal year 2024.
Paulsen said the state remains in “an extremely, extremely strong financial position” despite the projected drop in revenue. He pointed to Republican budget goals for fiscal year 2023: Reynolds and House and Senate leaders have proposed budgets that leave about 10% of state revenue intact. They plan to spend about $8.2 billion of the $9 billion available.
Republicans have repeatedly said that the state collects too much, hence the need to cut taxes.
“(With) the new tax law of a flat and fair individual tax rate of 3.9% by 2026, and the elimination of state income tax on pensions, among other tax reforms, Iowans will see more money in their pockets and not in the hands of the government,” Reynolds said in a statement Thursday.
Democrats disagree. Minority party leaders have proposed using excess state revenue to channel additional funds to education and other priorities.
Senate Minority Leader Zach Wahls tweeted that REC estimates show the tax cut will benefit wealthy Iowans “while likely causing future budget cuts to public schools, law enforcement and our healthcare system.
Paulsen, who was appointed by Reynolds, did not foresee falling state revenues leading to budget cuts.
“I don’t foresee any cuts to services… For the foreseeable future, no, I really don’t see any of those issues,” Paulsen said.
House Speaker Pat Grassley pointed to the “huge ending balance” and comprehensive taxpayer relief fund as buffers if revenue growth “isn’t necessarily getting to where we need it.”
“We implemented (the tax bill) over a couple of years and have these additional resources,” he said. “If there’s something we don’t plan for, we’ve built it moving forward.”