Governor Kim Reynolds appears unlikely to be able to balance Iowa's budget for the fiscal year that just ended without calling a special legislative session. The last time Iowa lawmakers needed to come back after adjournment to fix the budget was in 2002, when the country was in a recession that had begun the previous year.
This year's huge revenue shortfalls are happening during a time of economic expansion, the result of overly optimistic planning and business tax breaks that turned out to be much more costly than officials predicted.
Republican lawmakers and Governor Terry Branstad worked out a deal in January to reduce current-year state spending by $118 million. But even after those huge cuts to public services, Iowa's general fund was not taking in enough money to meet spending obligations for fiscal year 2017.
Republican leaders agreed in March to transfer another $131 million from the state's cash reserves. That wasn't enough to keep the books balanced either.
Senior staff from the Legislative Services Agency informed state lawmakers on July 3 that general fund revenues for fiscal year 2017, which ended on June 30, were still $104.4 million below projections. As Iowa State University economist Dave Swenson has explained, unrealistic estimates for income tax growth are one big reason the state will end up taking in roughly $350 million less this year than lawmakers were counting on when they approved the 2017 budget.
State tax projections were way off because sales tax payments were significantly lower than expected. [LSA senior fiscal analyst Jeff] Robinson said the state did see growth in corporate income taxes as well as personal income tax payments to the state.
“But sales tax was essentially flat year-over-year,” Robinson said. “We got $1.7 million worth of sales tax growth over those 12 months, so that was a surprise and that caused the shortfall this year.”
Reynolds administration officials have attributed the sales tax shortfall to the growth of online shopping by consumers. But Iowans have been using the internet to buy goods and services for years, without causing state revenue estimators to be way off the mark.
The difference now: a new sales tax break for Iowa manufacturers went into effect at the start of the 2017 fiscal year. Acting "on behalf of the Iowa Taxpayers Association," the Branstad administration had tried to implement that policy through an administrative rule. Democratic lawmakers were unable to block the unprecedented use of rulemaking, which Republican lawmakers supported. So they eventually agreed to a version of the sales tax break as part of broader tax legislation last year.
Jon Muller warned as long ago as October 2015, "This is an ongoing tax cut of increasing value," and "we should not be surprised if the real cost vastly exceeds the amount estimated by the beneficiaries themselves and subsequently aggregated by an Administration that has been pushing the tax cut for years." The Legislative Services Agency's Robinson noted in a fiscal analysis that the new sales tax cut would apply not only to "what could be generally considered manufacturing companies," but to any Iowa business that uses "machinery, computers, and equipment to 'manufacture' something."
Brianne Pfannenstiel reported for the Des Moines Register on July 3,
Though the 2017 budget year ended June 30, Gov. Kim Reynolds has said she will wait to address the shortfall until the state officially closes its accounting books at the end of September.
Because money is still moving, Robinson said, the $104 million shortfall could grow or decline before Sept. 30. Tax refunds, for example, will continue to be paid out in July and August even though they're attributed to the 2017 budget. Other revenue could come in as companies and others pay what they owe.
Reynolds has the authority to borrow up to $50 million from the state's reserve accounts to cover the imbalance, but anything beyond that would require a special session of the Iowa Legislature.
Robinson said it would be unusual, though not impossible, for the state to find enough money between now and the end of September to stave off a special session.
"Most years, no, there’s not $55 million worth of variance in there," he said. "Not normally."
Assuming a special legislative session happens this fall, Republican lawmakers and Reynolds administration officials will likely negotiate behind closed doors, then reveal a plan shortly before passing it in a day. Reynolds has previously said Iowa has plenty of money in its cash reserves to cover further shortfalls. One major credit rating agency determined last month, "Even after drawing on reserve funds to close a late-year budget gap, [Iowa's] rainy day funds will total more than $500 million or about 7 percent of revenues."
Democratic lawmakers have called for more comprehensive actions to address the recurring budget problems, including scaling back some of the business tax exemptions and tax credits that have exploded in cost lately. State Representative Chris Hall, the ranking Democrat on the Iowa House Appropriations Committee, wrote in a July 1 guest column for the Cedar Rapids Gazette, "The GOP is managing a credit card budget and spending cash reserves with no regard for the fact that they must be paid back. Working families are paying more in local property taxes as a result." After receiving the latest report on Iowa's fiscal situation, Hall commented in a written statement,
Net receipts show that we’re $104 million below our budget target, which is nearly impossible to make up before the books officially close on FY 17. The Governor and Republican leaders have put the state budget in the red for the third time this year and cut Iowa’s safety nets to their bare bones. We’ve seen tragedies involving some of Iowa’s most vulnerable populations, and prisons are so under-staffed that correctional officers are getting hurt on the job.
The Iowa GOP is pursuing the same failed experiment that bankrupted the state of Kansas. They’ve chosen not to address the runaway cost of tax credits and tax breaks to out-of-state companies, and have put Iowa into an unsustainable cycle. With a special legislative session looking more likely each week, will Republican leaders fix the budget mess they’ve created or will they just borrow more?
Past experience indicates that Republicans will choose "borrow and spend" over any path that would require businesses or wealthy individuals to pay more. Longer term, Reynolds and GOP leaders in the House and Senate have promised "tax reform" (which means new tax cuts) during the 2018 legislative session. To make up for lost revenue, they will likely slash programs that serve Iowa's vulnerable people or raise the regressive sales tax.
By the way, Muller expects Iowa revenue estimators to continue to revise projections downward. If so, more mid-year spending cuts will be on the table in early 2018. In Muller's view, current tax policies including the 2013 commercial property tax cut are not sustainable. He commented last week,
It seems perfectly sensible to use one-time money for ongoing expenditures when when the revenue shortfall is short-lived, a “rainy day.” But that’s not what’s happening. Rain is a metaphor we use to describe the business cycle. It’s more like we’re standing in a cold shower with our clothes on, and can’t manage to find a way to turn the water off because we broke the faucet, and we refuse to call a plumber. It is never going to stop raining without a law change. I just don’t see how it can.
Meanwhile, state officials can't say how much the Iowa Department of Human Services will spend on Medicaid during the 2018 fiscal year, which started July 1. Tony Leys reported for the Des Moines Register on July 3, "high-stakes negotiations" are happening "behind closed doors" between the DHS and the three companies that now manage Medicaid care. "Legislators who are supposed to be overseeing the state’s Medicaid system said last week that they have no idea how the new rate negotiations are going" or why they "are stretching past the date when the new rates were supposed to take effect." The DHS won't release documents estimating "how much health care Iowa Medicaid recipients will need in the new fiscal year, and predictions of how much those services will cost," Leys wrote.
Final note: the Iowa Department of Natural Resources just confirmed which jobs and services will be eliminated due to a reduction in funding for 2018. The Iowa Department of Public Health revealed last month which programs and services it would reduce or eliminate to cope with a smaller budget for the new fiscal year.