Governor Reynolds and the Iowa Legislature continue to toe the line for taxpayers through 2024 with prudent budgeting.
Despite national economic uncertainty resulting from high inflation, Iowa’s fiscal foundation was strong heading into the 2023 legislative session. One important reason for this success is the continued priority Governor Kim Reynolds and the Iowa Legislature are placing on prudent budgeting. In its Fiscal Policy Report Card on America’s Governors for 2022, the Cato Institute ranked Governor Reynolds as the best in the nation for her fiscal conservatism. “Governor Reynolds has been a lean budgeter and dedicated tax reformer since entering into office in 2017,” wrote Chris Edwards and Ilana Blumsack, authors of the report. This year, Governor Reynolds and the legislature are continuing to be at the forefront of conservative fiscal policy in the United States.
Last year, Iowa passed a general fund budget of $8.2 billion, an increase of just 1 percent from the prior year. This session the legislature enacted an $8.5 billion budget, which is a 3.6 percent increase from the previous year’s budget.
This holds the budget well below the Conservative Iowa Budget which set a cap on the budget of $8.8 billion based on the maximum rate of population growth plus inflation of 7.4 percent. In other words, taxpayers benefit from the budget growing well below the growth of the economy allowing more money to remain in the productive private sector.
In January Governor Reynolds proposed an $8.48 billion budget that reflected priorities such as funding the Students First Act, which created a universal education savings account (ESA). Budget negotiations between the House and Senate produced only a slight increase from the Governor’s original proposal, and an $8.5 billion budget that spends only 88.25 percent of the revenue projected during the March Revenue Estimating Conference (REC). Such restraint makes a bold statement, considering that the Iowa Code permits the legislature to spend up to 99 percent of projected revenue.
Funding for public education and programs within the Department of Health and Human Services (primarily Medicaid) continues to drive spending. Together, these two spending areas consume 80.7 percent of the General Fund budget. Education spending alone accounts for nearly 56 percent of the budget, even though it excludes education expenses paid with Iowans’ property taxes, which are collected and spent at the local level.
Education and DHS spending already leave little room in the budget for other basic government services, such as public safety and the courts, yet they are two of the fastest-growing areas of spending.
Critics attack spending restraint by arguing the legislature is depriving education or other programs of funding, but state spending has not decreased; the growth of Iowa’s budget has simply been slowed. It is only in government finance that slowing the growth of spending is seen as a cut. As a benefit, restrained spending is allowing pro-growth tax reform, leaving more money in taxpayers’ pockets, with a substantial tax relief package headed toward a low flat tax by 2026. Without spending restraint, any tax relief, regardless of the tax, becomes impossible, and without tax relief, the state’s economy would not be doing as well.
The state government is doing well, too. Iowa’s budget continues to be in surplus. The surplus for fiscal year 2023 is projected to be $1.7 billion, and the current estimated surplus for fiscal year 2024 is $2 billion. In addition, Iowa’s reserve accounts (the Cash Reserve Fund and the Economic Emergency Fund) are continuing to be funded at their statutory limits, with a combined balance of over $961 million. The Taxpayer Relief Fund also continues to grow. The balance in the fund for fiscal year 2023 is $2.7 billion and estimated to increase to $3.5 billion in fiscal year 2024.
Both Governor Reynolds and legislative leaders have signaled that further income tax reform will be a priority for the 2024 legislative session. Iowa Senate Republicans introduced an income tax reform proposal this past session that, if enacted, would have accelerated income tax rate reductions and used the Taxpayer Relief Fund to phase-out the income tax altogether.
While prudent budgeting and tax reform are crucial to Iowa’s success, Governor Reynolds has shown she understands they will be impossible to maintain unless decision-makers build on these policies with deeper, more-detailed reforms. Her state government reform measure, for instance, consolidates and makes government more efficient. Currently, Iowa has 37 executive branch cabinet agencies, more than all neighboring states. The governor’s proposal will reduce the number of executive-level agencies to 16, making government more efficient while saving taxpayer dollars.
This proposal — the first major reform of Iowa’s administrative state or bureaucracy in nearly 40 years — will save taxpayers an estimated $214 million or more over four years. Governor Reynolds also issued an executive order at the beginning of the legislative session that requires an extensive review of Iowa’s regulatory code.
These are the types of reforms that will help make conservative budgeting a possibility well into the future. A virtuous cycle of reform and results will allow Iowa to continue to control its own destiny, no matter what happens in Washington. The budget for 2024 suggests state leaders understand this principle and share the goal of continuing prosperity.
Iowa’s fiscal foundation is strong as a result of conservative budgeting. It is difficult for policymakers to say no to spending, especially with so many special interests calling for additional or new spending. In Iowa, Governor Reynolds and the legislature understand that just as with families and businesses, government must also make the difficult decisions on how to spend taxpayer dollars. Policymakers only need to examine the fiscal records of states such as Illinois, California, and even the federal government to understand that a government cannot tax or spend its way to prosperity.
President Calvin Coolidge regarded “a good budget as among the noblest monuments of virtue.” Government spending is at the heart of sound public policy. President Coolidge’s fiscal conservatism is being exemplified at the state level by Iowa Governor Kim Reynolds. Governor Reynolds, just as with Coolidge, understands that prudent budgeting is a virtue.