Freedom Watch 7/8/17
2017 Budget Update
The Fiscal Year 17 (FY17) budget ended June 30th. There has been a great deal of discussion in the media regarding the possibility of a Special Session to deal with the anticipated shortfall resulting from less than projected revenue for the year. In this week’s newsletter, I will explain the FY17 budget process step by step, with the hope of clearing up any confusion that may exist as to the state’s financial status and why this situation exists.
The original FY17 budget was set during the 2016 legislative session using the estimates of the non-partisan Revenue Estimating Conference (REC), as required by law. We applied the 99% expenditure law and set the budget. House Republicans insisted on using only incoming revenue minus the ending balance, because using the ending balance is one time money for on-going expenses and can lead to future budget shortfalls.
In 2017 the REC continued to hold its scheduled meetings and each time revised down the FY17 revenue estimate upon which we by law had built the budget in 2016. When the 2017 session ended at the end of April of this year, the REC had twice revised the estimate down, for a total reduction of about $251.4 million. The first revision down was met by the Legislature making the tough decisions to de-appropriate over $100 million from state budgets early in the Legislative Session. The next report by the REC lowering the estimate yet again came too late in the fiscal year for cuts, so the Legislature authorized the difference be taken from the Reserve Fund. As the end date of June 30th approached, the REC revised the estimate down once again, this time by about $97 Million. At this point, the Legislative Session had ended. The books for FY17 will be closed in September, and if the shortfall resulting from lower than predicted revenue exceeds the $50 million amount the Governor can legally take from the surplus fund, we will have to go into Special Session to authorize the steps necessary to balance the books for 2017.
There are many questions as to why revenue is less than projected when Iowa’s economy is at almost full employment. Most experts believe the reason is clear: the farm economy continues to struggle, and low corn prices ripple across the Iowa economic landscape, resulting in less spending and lower revenue. Some point to ever-increasing internet sales as a factor, for which tax revenue is not collected. It must also be acknowledged that the volatility that exists in the economy today makes accurate revenue estimates increasingly difficult.
Some have pointed to tax incentives and breaks for businesses to locate in Iowa as a drain on revenue, with some estimates as high as $400 million. These incentives, passed by both Democrats and Republicans over a number of years, were felt to be necessary at the time to compensate for the reality that Iowa’s tax structure is not favorable for economic development. Virtually every business and tax group gives Iowa a low grade on our tax structure and rate of taxation. With the Senate controlled by Democrats and the House controlled by Republicans for many years, agreement was not reached on tax reform to stimulate the economy. That reality has now changed, and once comprehensive tax reform is accomplished in the near future that makes Iowa more competitive, tax incentives should not be necessary.
When it comes to rolling back tax breaks and incentives for businesses in Iowa, which is being looked at by the House Appropriations Committee, we must tread carefully. We continue to try and get hard numbers, but it remains unclear how much impact tax incentives are truly having on revenue, when balanced against their benefit. For example, using the nationally recognized input-output economic modeling system known as REMI, the Iowa Economic Development Authority concluded that the fertilizer plant that located in Lee County as a result of tax incentives will produce 165 direct jobs, 1,592 indirect jobs, $108.8 million in direct wages and $143.5 million in indirect wages annually. Additionally, the Iowa Farm Bureau predicts that farmers in the state could save roughly $740 million a year in fertilizer costs. Clearly, the ramifications of eliminating these incentives must be carefully considered.
A question I have been often asked is what happened to the almost $1 billion surplus that existed when corn prices were soaring. Here is the breakdown:
• Over $300 million was returned to taxpayers through tax reductions.
• $114 million was used to pay off state debt.
• Almost $160 million flowed into the state’s Cash Reserve Fund.
• About $86 million was used for disaster relief.
• Nearly $80 million was for infrastructure investments.
• Roughly $280 million was used to cover lower than expected state revenues.
On a final note, there are some individuals that appear to be making inaccurate statements about the FY17 budget for political gain. Iowa, as a result of sound budget principles, is in a great position to absorb the lower than expected revenue growth. Our budgets have been and will continue to be balanced, our emergency fund is full, our reserve fund was used as it was meant to be used in filling the gap left by the inaccurate Revenue Estimate, and it will be refilled quickly as required by Iowa law. Iowa is in good financial shape, and will continue to be as long as we apply sound budget principles.
Going forward, we must find ways to increase the accuracy of our revenue estimates, and I will support changing the 99% expenditure limit to a lower number, such as 96%, to increase the cushion against inaccurate estimates. We must also continue to pursue government reforms that encourage self-reliance, not reliance on government, as well as elimination of waste and fraud.