Continued strong revenue collections are evidence that tax cuts were justified in the state of Iowa; without them, the state government would have withdrawn more from the economy than necessary to support its services.
Sarah Curry, DBA
The State Revenue Estimating Conference (REC) met in October to evaluate the current and next fiscal years, FY23 and FY24. Compared with its previous forecast in March, the REC increased net General Fund revenue by nearly $400 million for the current fiscal year. Even in the face of inflation and a workforce shortage, the state of Iowa is in a strong financial situation.
Although this increase eliminated most of the anticipated gap relative to actual collections from FY22, the REC expects a decrease in total tax revenue, year over year. This expectation is not surprising given the phase-in of the historic 2022 tax cuts. However, the updated projection represents only 2.7% less total revenue compared with FY22.
As the table below indicates, the reduction comes from the personal income tax and “other taxes” category. Under the tax reform, nine personal income tax brackets with a top marginal rate of 8.53% have simplified down to four brackets with a top rate of 6.0%. The legislation also repealed the state inheritance tax. With more of Iowans’ income and inheritance left in their accounts, the sales tax and corporate income tax are projected to post increases, which will offset much of the difference.
|FY 2022 Actual||October FY 2023 Estimate||Year-over-Year $ Change||Year-over-Year % Change|
|Personal Income Tax||$5,780.1||$5,531.8||-$248.3||-4.3%|
|Other Revenue & Refunds||-$1,282.8||-$1,438.3||-$155.5||12.1%|
|Total Net Revenue||$9,673.4||$9,408.7||-$264.7||-2.7%|
The REC also expects FY24 to post a reduction in total tax collections, as shown in the table below, but this prediction incorporates the second phase of income tax reductions, dropping to three brackets with a top rate of 5.70%, along with the first phase of corporate income tax reductions and the exemption of retirement income. Even so, when all other revenue and refunds are considered, FY24 will see a $60.2 million, or 0.6%, increase in total net revenue compared with FY23.
|October FY 2023 Estimate||October FY 2024 Estimate||Year-over-Year $ Change||Year-over-Year % Change|
|Personal Income Tax||$5,531.8||$5,202.1||-$329.7||-6.0%|
|Other Revenue & Refunds||-$1,438.3||-$1,224.5||$213.8||14.9%|
|Total Net Revenue||$9,408.7||$9,464.9||$56.2||0.6%|
Overall, the continued strong 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 withdrawn more from the economy than necessary to support its services. 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 December 2022 and it will set the stage for opening day of the 90th Iowa General Assembly on January 9, 2023.