More grim economic news

Sorry to bring you down on a Friday afternoon, but the Iowa Revenue Estimating Conference released new estimates today, and it ain’t pretty:

The conference estimated that the current year’s revenues will sink by $129.7 million compared to its December estimate. Revenue for the budget year that begins July 1 will drop by $269.9 million.

The drop is in addition to December’s estimates, which cut $99.5 million in the current year and $132.6 million in the fiscal year that begins July 1.

Charlie Krogmeier, Gov. Chet Culver’s chief of staff and a member of the conference, said federal stimulus money may help offset the blow but that the dramatically lower estimates will leave lawmakers with tough options.

It would be difficult to find enough job cuts and furloughs in the current fiscal year to fill the gap. The fiscal year ends June 30, in roughly 10 weeks. […]

House Majority Leader Kevin McCarthy […] and other Democratic leaders noted on Thursday that they were already planning a budget that was $130 million less than Culver’s in the upcoming fiscal year. It’s unclear how they will make up the additional $270 million loss for the current and upcoming year.

Clearly difficult choices lie ahead. I urge Iowa leaders not to implement spending cuts alone, because cutting government spending too much during a recession can make things worse.

I was encouraged to read recently that legislators are looking carefully at all of the tax incentives Iowa provides. The combined effect of all these tax incentives is larger than all state spending:

There are at least 191 tax breaks for income and sales taxes that cost or prevent Iowa from collecting almost $7.2 billion, according to a 2005 review by the Iowa Department of Revenue and Finance.

That’s more than total state spending, which is projected to be $7.1 billion next year.

Not all of these tax breaks provide good value for the lost revenue, and not all of them can be preserved with the budget shortfall we’re facing.

In other unpleasant news this Friday, the Principal Financial Group, one of Iowa’s largest employers, announced pay cuts between 2 and 10 percent, which will affect all employees, management and the board of directors. Some benefits will also be reduced.

Principal already imposed a large layoff in December, and I think they are doing the right thing by reducing pay rather than cutting more jobs now. Labor market specialists differ on whether it’s better for companies to cut pay or lay off more workers in lean times. Click here to read some arguments for reducing pay, or click here for the pro-layoff argument.

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  • Careful about tax cuts

    One proposed tax cut before the Iowa Legislature, which just emerged last week, is in HSB 273 and could mean more land taken out of conservation.  HSB proposes to eliminate the Forest Reserve Program by 1/10/10 — no longer provide a tax exemption for folks keeping their land in forest preserve in Iowa.  Interestingly, in the same Iowa code as the Forest Reserve Program is the same tax break for apple orchards (fruit tree reservations).  HSB 273 does not propose to eliminate that tax break–even though it’s on land that provides an income!  

  • More layoffs ahead?

    It’s admirable that Principal was trying to save jobs with the paycut.  But their move to restrict the amount of vacation hours that employees can accrue may signal that more layoffs are ahead.  Since Principal would have to pay out those hours to laid-off employees, the move makes their next round of layoffs cheaper.  And the remaining workforce has more responsibility with less pay.  Losing 100 hours of vacation time is like taking that many hours of pay from a fired worker’s financial reserves.