As long as spending is under control, the state will continue to be in a strong fiscal position to provide the core government services Iowans expect while continuing to lower taxes and spur economic growth.
The State Revenue Estimating Conference (REC) met on December 14, 2022, to evaluate the current (FY23) and next (FY24) fiscal years. December REC meetings are noteworthy because this particular projection establishes limits that must be followed by both the Governor and by the Legislature in developing the State’s budget.
Compared with its previous forecast in October, the REC increased the net General Fund revenue projection by $81.1 million for the current fiscal year. Even in the face of inflation and a workforce shortage, the state of Iowa is maintaining a strong financial situation.
While the REC expects a decrease in total tax revenue from FY22, this expectation is not surprising. As the phase-in of the historic 2022 tax cuts commences in January, income tax rates begin to be reduced and taxes on retirement income are eliminated. An earlier phase-out of Iowa’s inheritance tax continues into 2023, as well. Even given those changes, the updated projection represents only -1.9% less total revenue than FY22.
As the table below indicates, the revenue reduction comes from the personal income tax and “other taxes” categories. Individual income taxpayers will benefit in 2023 when Iowa’s nine personal income tax brackets with a top marginal rate of 8.53% have been reduced down to four brackets with a top rate of 6.0%. While more of Iowans’ income and inheritance will be left in their bank accounts, the sales tax and corporate income tax are projected to post increases, which will offset much of the difference.
|FY 2022 Actual||December FY 2023 Estimate||Year-over-Year $ Change||Year-over-Year % Change|
|Personal Income Tax||$5,780.10||$5,576.60||($203.50)||-3.50%|
|Other Revenue & Refunds||($1,282.80)||($1,370.70)||($87.90)||6.90%|
|Total Net Revenue||$9,673.40||$9,489.80||($183.60)||-1.90%|
The REC also expects FY24 to post a slight reduction in total tax collections, as shown in the table below, but this prediction incorporates the second phase of personal income tax reductions, dropping to three brackets with a top rate of 5.70%, along with the first phase of corporate income tax reductions. Even so, when all other revenue and refunds are considered, FY24 is projected to realize a $6.3 million, or 0.1%, increase in total net revenue compared with the FY23 estimate.
|December FY 2023 Estimate||December FY 2024 Estimate||Year-over-Year $ Change||Year-over-Year % Change|
|Personal Income Tax||$5,576.60||$5,247.80||($328.80)||-5.90%|
|Other Revenue & Refunds||($1,370.70)||($1,183.30)||$187.40||-13.70%|
|Total Net Revenue||$9,489.80||$9,496.10||$6.30||0.10%|
Overall, the revenue collections predicted by the REC are evidence that tax cuts were justified in the state of Iowa; without them, the state government would have continued to take more from taxpayers and the economy than was necessary to support its operations. After all, FY 2022 closed with a $1.9 billion budget surplus. As the tax cuts are phased in over the next few years, Iowans must keep an eye on both sides of the state’s accounting ledger. While the effect of tax reductions on collections is important, so is the government’s behavior on the spending side.
The state only needs enough revenue to meet their spending requirements. Therefore, as long as spending is under control, the state will continue to be in a strong fiscal position to provide the core government services Iowans expect while continuing to lower taxes and spur economic growth.
The next REC meeting will be held in March 2023 and will provide lawmakers additional insight as they finalize the state’s budget.