News roundup on Iowa revenues, taxes and budgeting

Iowa’s three-member Revenue Estimating Conference again raised projections for state revenues during the current fiscal year and fiscal year 2012, following another month of growing state tax collections in November. The news hasn’t deterred Republican leaders from planning mid-year budget cuts, and legislators from both parties acknowledged the end of federal stimulus funds will make the next budget year difficult. Details and proposals are after the jump.

Numbers released today foresee “an additional $34.1 million [in state revenues] in the current fiscal year and $85.5 million next year.” Staff who work for the legislature and Governor-elect Terry Branstad will use those numbers in drafting the 2012 budget.

Although state revenues will be larger next year than this year, and Iowa will finish fiscal year 2011 with approximately $886.6 million in surpluses and reserves, the state’s general fund budget will need to shrink in fiscal year 2012. The Republican takeover of the U.S. House of Representatives in effect eliminates the prospect of any significant federal fiscal aid in the next budget year. This year several hundred million federal dollars supported state programs, particularly education and Medicaid. Incoming Iowa House Appropriations Committee Chairman Scott Raecker estimated today that next year’s budget will have to be trimmed by $600 million to $700 million. I’ve seen other estimates in the $400 million to $500 million range. Senate Majority Leader Mike Gronstal told reporters that today’s “good news” does “not by a long shot solve all of our problems and we’re going to struggle through a very challenging budget year.”

President Barack Obama’s likely capitulation on extending all the Bush tax cuts will, ironically, increase Iowa tax collections by about $150 million per year. Iowa is one of the few states that still allows people to deduct federal tax payments from their income for state tax purposes. (Statehouse Democrats failed in 2009 to pass a tax reform package that would have eliminated federal deductibility.) Consequently, wealthy Iowans who don’t face a federal tax increase will be paying state taxes on higher net incomes.

Iowa House Republicans are planning to introduce a bill early in the 2011 session to cut current-year expenditures. I look forward to seeing how the Legislative Services Agency scores Republican money-saving proposals like privatizing the state vehicle fleet and ending “benefits” to undocumented immigrants. Incoming Iowa House Minority Leader Kevin McCarthy had some words of warning today:

Republicans will likely find that the true savings behind a plan to reduce or eliminate much of the state’s vehicle fleet, for example, are limited, at best, McCarthy said.

“In the minority, it’s easier to offer an amendment and give a good rhetorical argument … but when you live in the majority, you have to govern and you have to score those things,” McCarthy said.

Meanwhile, Governor-elect Terry Branstad will introduce a biennial draft budget to state legislators.

Dave Roederer, who will serve as the governor-elect’s top budget aide, says Branstad sometimes submitted two year budgets during his previous terms in office. “And then they would make whatever adjustments needed to be made in the second year of the biennium,” Roederer explained. “We believe by doing that you’ll get a better look at what the implications are for programs passed in one year.”

But Roederer admits Democratic-controlled legislatures that worked with Branstad in the past typically did not go along with a two-year budget.

Bob Dvorsky, incoming Iowa Senate Appropriations Committee chairman, told Radio Iowa that the upper chamber will approve only a one-year budget during the 2011 session, saying a two-year budget “gives too much authority to the executive branch and limits flexibility in a changing economy.” Many states have abandoned biennial budgeting, because it’s hard enough to accurately project state revenues 12 months into the future, let alone 24 months out.

At a forum organized by the Associated Press today,

Branstad also was asked about his support for reducing commercial property taxes, which he argues must be cut to make Iowa more competitive with nearby states. Although he focused on business taxes during the campaign, Branstad on Monday called for also limiting residential and farmland property taxes.

Farmland property taxes, the governor noted, are linked to prices farmers are getting for commodities, such as corn and soybeans. Those prices have soared in recent years, driving up taxes.

Branstad didn’t offer a specific funding source to pay for reductions in farm and residential property taxes but said he would offer details in a new state budget that he must deliver to the Legislature by the end of January.

Republican Iowa Senate Minority Leader Paul McKinley said reducing commercial property taxes will take “a really lot of heavy lifting.” Future House Speaker Kraig Paulsen said “we need to go out there and try” to reduce commercial property taxes, but he didn’t promise results next year on the “extremely difficult” task. Senate Democratic Leader Gronstal laid out some terms that would satisfy his caucus:

“We’re very open to property tax relief, but not one that results in a shift,” said Senate Majority Leader Mike Gronstal, D-Council Bluffs. “If I agree to cut your taxes and I do nothing about everybody else in the room, it’s a gigantic tax shift to the other people in the room.”

Gronstal said he’s also not interested in robbing local governments of a significant portion of their tax revenues. Any commercial property tax cuts must be accompanied by an effort by the state to replace those lost revenues, he said.

Gov.-Elect Terry Branstad, a Republican, said today that said new commercial properties should be taxed at 60 to 65 percent of market value. He has said that existing commercial property owners’ taxes should be lowered to that level over five years.

Branstad said he would like to model commercial property tax cuts on the machinery-and-equipment tax reform that happened in the 1980s.

Gronstal said that particular reform took away local governments’ ability to tax certain portions of machinery and equipment.

“That was pretty close to the biggest unfunded mandate in the history of the state,” Gronstal said.

And it “led to a tax increase for homeowners and for farmers,” he said. “That’s the reality.”

The League of Cities and Iowa Association of Counties are powerful lobby groups and will oppose any property tax relief package that doesn’t replace revenues to local governments. Branstad isn’t making any promises on that front:

Governor-elect Terry Branstad said government at all levels will be expected to make sacrifices given the current budget realities. He said he planned to lead by example by reducing staff positions in the governor’s office and paring the size of his office’s security detail by transferring law officers to other highway-safety and enforcement assignments. […]

“I know change is sometimes painful but I think the most important thing is that we focus on the end result,” he added. “It’s not our obligation to maintain the status quo in terms of the size and the cost of government, in fact the American people are saying we can’t afford it. The American people said very clearly in this election that we want a new direction.”

Branstad will have his legal staff look into options for handling the two-year contract deal that outgoing Governor Chet Culver approved with AFSCME, the largest union representing state employees. Branstad and his advisers have repeatedly criticized Culver for not allowing Branstad to complete the contract negotiations. Appearing on Iowa Public Television late last week, Democratic House leader McCarthy said Culver should not have finished the negotiations:

“Perception is reality in politics and I think this raises a lot of questions that did not need to be raised,” McCarthy says. “I think Culver should have waited.” […]

McCarthy says the substance of the new pay deal Culver has approved may seem “reasonable” since AFSCME workers agreed to pay cuts last year, but the deal may put more strain on relations between Governor-elect Branstad and all the unions that represent state employees.  

“I can see how this happened,” McCarthy says. “Governor-elect Branstad kind of basically declared war on state employees with campaign rhetoric. When the election was over, he’s made it very clear that he’s going after state employees.”

AFSCME is gearing up to do battle with Branstad, judging from a statement that AFSCME Iowa Council 61 President Danny Homan released on December 3:

Every two years, under Iowa law, AFSCME is required to submit its contract proposals to the state of Iowa.  Also, under Iowa law, the state is required to respond within 14 days.  The AFSCME bargaining committee held meetings and developed a modest proposal, containing only changes to wages, and the state accepted this proposal.  Neither I nor the AFSCME bargaining team had discussions with the current Governor about these contract negotiations during this process.  There was no “backroom deal,” or “payback” as many have suggested, and those making claims like that are only trying to score cheap political points.

In the past few years, AFSCME has been very involved in helping to cut costs to the state budget.  AFSCME members have taken pay freezes; they voted to take 5 days of off without pay, and also lost part of their deferred compensation.  AFSCME members who know how state government works on the front lines submitted many good ideas that were eventually included in the successful government reorganization that occurred last year.  We also believed strongly in the early retirement program that was implemented, which resulted in around 2000 state workers leaving their employment with the state.  We believe that these actions have helped Iowa to save millions, and we now have a budget surplus.

Despite those efforts and a very modest contract proposal, Governor Branstad and Iowa Republicans seem more interested in threatening Iowans with layoffs and cuts to services.  It seems incredibly disingenuous to claim the state has no funds for a small increase in pay for state workers, while at the same time these same people are proposing to cut corporate taxes by 50%.

We think that it’s important to have our roads cleared in the winter, so that citizens and business can continue to function.  We think it’s important to have our prisons properly staffed, so that our citizens are safe from violent offenders.  We also believe that it’s important that the state is able to protect kids from abuse, make sure child support claims are investigated, and take care of people in mental health institutions and in our Veteran’s Home.  During the campaign AFSCME members and I challenged candidate Branstad to say exactly what 15% of state services he thinks aren’t essential, and he was never able or willing to answer that question.  Unfortunately, I fear that all Iowans will soon find out where his priorities are – helping out the corporations that funded his campaign with a tax cut the state can’t afford when we’re starting to set our budget straight.  

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