Dan Huseman, Week 10 — March 16, 2017

“March Madness” is upon us and as usual, there is a lot of chatter throughout the Capitol revolving around basketball. With the completion of the Iowa high school tournaments, attention now turns toward the college teams, both men and women, as they battle for national championships. Making it to the “Final Four” is a great accomplishment. It is also a nice reward as the long season comes to an end.

While it is somewhat sad to see the basketball season end, it is also a time of anticipation. Spring is right around the corner, and crops will soon be planted as the temperatures warm. We all know that in Iowa, there are only a few months to enjoy all of the outdoor activities. It always amazes me to see how much “fun” that people can cram into a short amount of time. Be safe, but please take advantage of the recreational opportunities we have here in Iowa.

The state’s panel charged with forecasting tax revenue conducted their spring meeting on Tuesday, which produced results that lowered Iowa’s expected revenue growth.

The Revenue Estimating Conference reduced the level of state revenue expected to be generated in the current fiscal year (FY 2017) to $7.106 billion. This is a reduction of $105.9 million from the panel’s last forecast in December, when they projected General Fund revenue to be $7.2119 billion. The percent of revenue growth when compared to FY 2016 will be 2.7 percent.

For FY 2018, the committee projected that the state will collect $7.3645 billion during the upcoming year, a figure equating to 3.6 percent growth. The March number is $191.8 million lower than the forecast developed in December. Since the estimate was lowered, Governor Branstad is required to submit a revised budget to the Legislature within 10 days.

In its initial look at Fiscal Year 2019, the REC projected that state revenue will be $7.6265 billion for the year starting July 1, 2018.

The new numbers for FY 2017 and FY 2018 have many people asking what happened to cause the change. The three-member panel always begins its deliberations with comments on how they view the state’s economic situation and they are usually insightful into their thinking.

Clearly, one of the major factors is the continuing sluggishness of state revenue is the agricultural economy. Over the last year, the state has seen a continued decline in the ag-related tax revenue. Initial farm tax returns show that this decline has continued into this tax season, as estimated personal income tax payments and payments with filed returns are currently down five percent.

The impact of lower commodity prices affects other parts of the state economy. Much of Iowa’s manufacturing base is ag-related. When the Iowa farmer doesn’t have the money to buy a new tractor or planter, the Iowans working at John Deere, Kinze, and Vermeer end up working fewer hours.

And while Iowa’s unemployment rate has remained relatively low when compared to other states, nearly half of those without work last year came from the manufacturing and construction sectors. That’s important, since those two sectors account for 18 percent of Iowa workers, but earn 30 percent of the wages in the state.

Sales tax revenue has not seen growth during the fiscal year. Members of the Revenue Estimating Conference called the situation “perplexing” as sales tax is considered one of the most stable forms of revenue and other economic indicators say that sales tax collections should be increasing. Iowa is not the only state that is experiencing this during the current fiscal year.

Even with the reduction in projected revenue growth, there are still signs of strength in the Iowa economy. Building permits for new homes are currently at their highest level since 2006. Existing home sales are also strong throughout the state. This year’s mild winter has allowed Iowa’s construction season to be extended. The significant rise in the stock market since November’s election is also likely to result in growth in capital gains tax payments to the state at some point.

On the national level, GDP growth has been strong, with it expected to rise 4.3 percent this year. A tightening labor market across the country is likely to result in growing wages. Nationally, wages are projected to rise 5.2 percent annually during the next two years. And with the Iowa unemployment rate being lower than the national level, the pressure to raise wages in order to retain workers may be even greater.

Overall, the picture painted by the Revenue Estimating Conference still shows revenue growth. That growth is not at the level projected at the earlier meetings of the panel, which will make for an interesting budget process this spring.

On Tuesday, Rep. Pat Grassley (R-New Hartford), Chairman of the House Appropriations Committee, issued the following statement regarding the Revenue Estimating Conference’s latest revenue projections: “There is no time to waste.  While a reduction in state revenue this far into the fiscal year is challenging, sound budgeting principles will allow us to craft a plan that keeps the budget balanced and Iowa moving forward.”

Going forward the plan will be threefold:

• First, taxpayers and the Legislature need more accurate revenue estimates from the Revenue Estimating Conference.  We understand this is a difficult task that many states are struggling to deal with right now, but we need to find a way to better predict state revenue.  Changes in how the state tracks and collects revenue need to be made to make estimates more reliable.

• Second, a very hard look needs to be taken at the “what” and “where” taxpayer money is used to make sure Iowans are getting the best value and their priorities are being met.  This very well could mean the state needs to curtail or end longstanding spending.

• Third, every tax credit is on the table.  The sacred cows need to be reevaluated to make sure taxpayers are getting a good deal.  A complete approach needs to start immediately instead of the piecemeal, year-by-year strategy that has been in place.

You may reach me at the Capitol during the week by phoning me at 515-281-3221, or at home on weekends at 712-434-5880. You may write me at the State Capitol, Des Moines, Iowa, 50319. My home address is P. O. Box 398, Aurelia, Iowa 51005.   If you have email, please contact me at dan.huseman@legis.iowa.gov.