Jon Muller examines factors contributing to Iowa’s budget crunch. What do you want first: the bad news or the “quite disturbing” news? -promoted by desmoinesdem
The Iowa Revenue Estimating Conference (REC) reduced its FY 2017 estimate for General Fund Revenues by $106 million. That’s on top of the $96 million downward revision in December 2016. Since the original estimate used for FY 2017 appropriations (December 2015), cumulative downward revisions total $243 million on a $7.3 billion budget.
This has led to all the gnashing of teeth that comes every time revenues begin to slow. The REC has never been particularly prescient when it comes to predicting the turn in receipts, either on the way down or the way up. I have some insight into this phenomenon because I used to be a revenue estimator for the Iowa General Assembly, and wasn’t any better than they are now. Indeed, economic models in general are not very good at predicting turns in the business cycle until after they happen. They are very good at generating consensus forecasts that tend to magically predict the next year will look a lot like the current year, at least during stable periods.
What’s new this time around is, according to policy makers expressing concern about the downgrade, is the reduction in revenues during what is considered a reasonably healthy economy. In my view, the stress on the General Fund is actually due to two primary factors. The economy is perhaps not quite as robust as consensus opinion suggests. Secondly, it appears the cost of House File 2433 passed during the 2016 legislative session, a bill providing a sales tax exemption for items consumed in manufacturing processes, was dramatically understated.
I suspect those looking to blame the sluggishness on a downturn in the farm sector will be disappointed as farm income growth begins to turn positive. Those who believed hundreds of millions of dollars of tax cuts and credits would spur state revenue growth should be equally disappointed. It’s just not happening.