Iowa’s taxpayers deserve better constitutional protections against the unquenchable appetite for government spending. Stronger limits can ensure spending remains under control, especially when fiscally conservative policymakers are absent.
Going into the 2023 legislative session, Iowa’s fiscal foundation is strong. The Revenue Estimating Conference (REC), which is a three-person collaboration between the governor’s office and the Legislative Services Agency, is tasked with the difficult job of coming to consensus on the projections the state will use for budgeting.
In December, the REC estimated revenue for fiscal year 2023 (FY23) at $9.6 billion. Governor Kim Reynolds used December’s estimate to plan her proposed $8.5 billion FY24 budget. Iowa’s fiscal foundation remains strong despite the national economic uncertainty because of the state’s fiscal conservatism and prudent budgeting.
The benefits of this approach are clear. Iowa’s anticipated $1.6 billion surplus for FY23 is nearly as much as the $1.9 billion surplus in FY22, with another $2.2 billion surplus expected in FY24. The state should have $895.2 million in reserve funds in FY23 and $962.5 million in FY24 — the statutory maximum for each year. Additionally, the Taxpayer Relief Fund is on track to increase by $1.6 billion, to $2.7 billion, in FY23, with another increase of $662.6 million in FY24, to $3.4 billion.
In short, the state government of Iowa is awash in cash thanks to conservative budgeting. These policies must continue to provide substantial tax relief, and lawmakers can build upon their success by passing a state budget below the recommendation of the Iowans for Tax Relief Foundation (ITRF). Our 2024 Conservative Iowa Budget sets a maximum threshold for general funds of $8.8 billion, based on 7.4 percent rate of population growth plus inflation (see Figure 1). Governor Reynolds’ budget proposal meets this goal. The House and Senate now must offer up their budget targets and then all three proposals will have to be meshed together. Spending restraint when crafting the state’s budget is always important, as it protects taxpayer dollars now and in the future.
Going a step farther, the state should write the Conservative Iowa Budget principles into its constitution or statutory code. Thus, Iowa would assure residents and businesses that it will continue to improve as a place to live, raise a family, and start a business, which will in turn strengthen the state’s trajectory.
Recent Iowa Budget
In its Fiscal Policy Report Card on America’s Governors 2022, the Cato Institute ranked Governor Reynolds as the best in the nation. “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.
Last year, Governor Reynolds and the Iowa Legislature continued to place a priority on prudent budgeting. The budget for FY23 was $8.2 billion, increasing by just 1 percent from the prior year.
In 2022, Iowa also enacted the most comprehensive income tax reform package in the nation — the largest in state history. Over four years, the nine-bracket income tax will transform into a flat tax with a 3.9 percent rate. The co rporate tax will also gradually shrink until it reaches a flat 5.5 percent rate and has already been reduced from 9.8 percent to 8.4 percent. These measures constitute a sound pro-growth tax policy that will create incentives to work, save, and invest. On the national stage, this tax reform will make Iowa’s economy more competitive.
Prudent budgeting is essential toward ensuring these income tax rate reductions can be responsibly implemented. Even with national economic uncertainty, Iowa’s revenue continues to grow, reducing the degree to which the tax cuts must be “paid for” through spending restraint.
Governor Reynolds has reaped additional benefits from a fiscally conservative agenda with an executive order imposing a moratorium on regulations. Furthermore, state agencies must begin reviewing existing regulations to determine their relevance and economic impact to ensure “existing rules — each and every one — are worth the economic cost,” as Governor Reynolds stated. “Only those that meet this standard will be reissued. The rest will be repealed. When it’s all said and done, Iowa will have a smaller, clearer, and more growth-friendly regulatory system.” Agencies have four years to complete the review process. The governor is also proposing to rein in the administrative state by streamlining government, consolidating the 37 cabinet-level agencies to 16. The process has already begun, and the governor’s office estimates consolidating agencies and other administrative reforms will save taxpayers close to $215 million over the next four years.
Need for Stronger Spending Limits
Most states have some form of TEL in statute or (less commonly) in the state constitution. A strong limit can ensure spending remains under control, especially when fiscally conservative policymakers are absent. However, not all TELs are created equal. An effective limit should be determined by the average taxpayer’s ability to pay for the priorities of government, not the appropriator’s cost of providing them.
Iowa has a weaker spending limitation than many states: a fiscal rule in state statute restricting the legislature to spending no more than 99 percent of estimated revenue. Efforts in the Iowa Legislature to strengthen this limit have proven unsuccessful, so far. Most recently, the Iowa Senate passed Joint Resolution 9 in 2017. This constitutional amendment would have limited the annual increase to the lesser of 99 percent of the estimated revenue or 104 percent of the prior year’s revenue. (Historical comparisons including the existing and proposed rules are visible in Figure 3 below.)
Iowa’s taxpayers deserve better constitutional protections against the unquenchable appetite for government spending. Families and businesses must make difficult budget decisions on a regular basis; this experience should not be so rare in government. With spending limitations in place, argues economist Daniel J. Mitchell, “politicians are forced to abide by the rules that apply to every household and business in the state. In other words, they have to prioritize,”
Colorado has shown this principle in practice. In 1992, voters adopted the Taxpayer Bill of Rights (TABOR), which was a constitutional amendment limiting government spending of most general funds at the state and local levels to a maximum rate of population growth plus inflation. Voters must also consent to spending increases above that level. If revenue exceeds the limit, the money returns to taxpayers as tax rebates. Unfortunately, progressives have weakened Colorado’s TABOR over time, and the tax rebates have encouraged dependency on government rather than translating into tax rate cuts. Nonetheless, since its enactment, TABOR has returned $8.2 billion to taxpayers.
Other states enacted measures similar to TABOR, proving that different approaches can be successful. Kurt Couchman, a Senior Fellow with Americans for Prosperity, argues that a “rules-based structural balance is a promising alternative,” focusing on the following:
“Structural balance can provide both short-term policy stability and long-term fiscal responsibility,” according to Couchman, putting pressure on the growth of spending and utilizing debt brakes and revenue limits
Texas also has implemented a strong spending limitation. In 2021, the legislature codified a new spending limit in SB 1336, which is arguably now the strongest in the nation. Based on the Texas Public Policy Foundation’s Conservative Texas Budget, the new spending limit sets a cap on all general revenue based on the rate of population growth and inflation. Exceeding the cap requires a three-fifths vote in both chambers of the legislature. “This change effectively puts tax relief on Texas’ permanent agenda. Policymakers can lock in tax relief by tying Texas’s future fiscal surpluses to automatic tax cuts,” writes Michael Lucci, a senior fellow at the State Policy Network.
Because spending and tax limitations can take various forms, Matthew Mitchell, now a senior fellow at the Fraser Institute, contends the most effective will:
Joining these guidelines with the examples described above, the ideal limit would cover the broadest base of the budget possible, with a maximum growth rate limited to population growth plus inflation. It would also return the resulting surplus funds to taxpayers through reduced tax rates, not tax rebates. Such a policy would give Iowa the strongest spending limit in the nation and solidify responsible budgeting in law for a consistent, predictable future.
President Calvin Coolidge regarded “a good budget as among the noblest monuments of virtue,” and it is incumbent upon Iowa’s lawmakers to be virtuous in this way.
Historical Iowa Budget
Figure 2 compares Iowa’s General Fund increase over the past decade with the state’s population growth plus inflation, as measured by the U.S. Chained Consumer Price Index (CPI). While the growth of appropriations has been below this benchmark for the full period, that result is attributable solely to the fiscal responsibility of the last four years.
The relative recency of this proper balance places a spotlight on the need to implement policy to prevent backsliding.
Figure 3 illustrates the current statutory spending limit’s failure to control appropriations over time. Its weakness has allowed excessive growth in the budget over time. The figure also shows that Senate Joint Resolution 9 would also have been insufficient.
In contrast to Iowa’s existing revenue-focused method, setting a spending limit that tracked with population growth plus inflation would have provided even more restraints on the expansion of government since 2013, leading to more conservative budgets and greater opportunities for tax relief. In fact, actual budget growth above this measure has been a cumulative $2.9 billion since 2013, meaning that taxes Iowans paid over that time period could have been at least $2.9 billion less . Put differently, an average family of four has paid nearly $3,700 more in taxes than if the state had adhered to a different spending limitation.
Conservative Iowa Budget
Iowans are fortunate that in recent years the governor and legislature have been budgeting in the spirit of the Conservative Iowa Budget. Even without a stronger state spending limit, the fiscal discipline exhibited by lawmakers has contributed to large surpluses and tax reforms and relief. To continue this conservative trend, ITRF is releasing the FY24 Conservative Iowa Budget with a maximum threshold of $8.5 billion, based on the summed rate of 7.4 percent. This target combines the 0.2 percent rate of state population growth with the 7.2 percent rate of U.S. chained-CPI inflation in 2022. Holding the Iowa state government’s budget to this level will provide opportunity for tax relief in the face of economic headwinds from bad policies out of D.C. A 40-year-high level of inflation (without corresponding wage growth) and market corrections responding to Congressional overspending, President Biden’s overregulating, and the Federal Reserve’s overprinting of money, make well-considered and consistent tax policy imperative.
Iowa has been at the forefront of conservative budgeting in the United States. This approach has left more money in taxpayers’ pockets with a substantial tax relief package headed toward a low flat tax by 2026. This process must continue to ensure Iowans’ flourishing.
Fortunately, Governor Reynolds’s FY24 budget proposal continues her practice of fiscal prudence. Limits on spending will be paramount for further income tax reform, and the governor has already signaled that Iowa will not be complacent at 3.9 percent. Talk of lowering the income tax rate to a flat 2 percent with a pathway to eventually eliminating the tax keeps the focus where it ought to be. Rejecting complacency is important when it comes to state-government spending, too. A stronger spending limit will not only help to protect the interests of taxpayers, but it will also keep the growth of government in check. On its current path, Iowa can expect a robust economy, a flourishing civil society, and prosperous people, but the work of getting government out of the way while funding basic services is not complete.