Iowa is demonstrating financial resiliency on numerous measures, despite the uncertainty plaguing the broader American economy.
The State Revenue Estimating Conference (REC) met on March 10, 2023 to evaluate the current (FY23) and the next two fiscal years (FY24 and FY25). Members on the REC mentioned that Iowa’s withholdings are starting to show impacts from the tax cuts, but Iowa continues to be “in an extremely strong financial situation moving forward.” Compared with its previous forecast in December 2022, the REC increased the total net receipts projection by $98 million for the current fiscal year to a total of $9.75 billion.
One member said, “The state is currently $365 million ahead of what it collected in FY2022,” while another commented, “I am very pleased to see Iowa’s economy is doing as well as it is.” Even with the state in a strong position, the members discussed taking a conservative approach to forecasting because multiple factors could impact revenues in the future, including a national recession. Iowa is demonstrating financial resiliency on numerous measures, despite the uncertainty plaguing the broader American economy.
March REC meetings are noteworthy because downgrades to the upcoming year’s estimate impact the state’s budgeting parameters. Since the REC predicts an increase in the state’s revenue compared to the December prediction, lawmakers will continue to use the lower figure from the December projection for budgeting purposes. Changes only occur when there is a decrease in predicted revenue from previous estimates.
The previous REC expected a decrease in total tax revenue from FY22 to be -1.9%, with the new March estimate projecting FY2023 revenue only decreasing -0.9%. While the REC expects a decrease in total tax revenue from FY22, it is less dramatic than originally predicted. As the phase-in of the historic 2022 tax cuts continues, income tax rates have been reduced and taxes on retirement income are eliminated. An earlier phase-out of Iowa’s inheritance tax continues into 2023, as well. As the table below indicates, the revenue reduction comes from the personal income tax and the sales/use tax categories while corporate income and “other taxes” are posting increases comparted to FY2022.
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 only $100 million less, or 1.0%, decrease in total net revenue compared with the FY23 estimate.
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 has not been scheduled.