Revenue forecast: A confirmation of failure

Iowans need a handle on what the budget surplus means, and what it doesn’t.

With new revenue information in hand, it is apparent that:

•   Large cuts to higher education were unnecessary
•   Continuing to short-change K-12 schools was needless
•   Concerns about large tax cuts were warranted.

During the 2018 session we saw legislators craft mid-year cuts and an FY2019 austerity budget behind closed doors. The effect will be the same as it has been for several years now: Iowa lawmakers won’t have much to work with when the 2019 legislative session convenes in January due to large tax cuts, leaving tight purse strings for education.

The October 2018 Revenue Estimating Conference (REC) projections show a $127 million surplus — up $95.6 million from what was expected for fiscal year 2018, which ended in June.[1] Many in the state are searching for factors they think contributed to the surplus. In reality, the discrepancy in expected and actual revenue is related to errors in forecasting. The REC used a slower rate of growth in calculating these projections after overestimating revenues for the past two fiscal years.

A significant factor contributing to the surplus is a state revenue boost caused by new federal tax cuts, especially for higher-income families. Iowa has a special state break for federal taxes paid. But because fewer federal taxes are being withheld, additional income is subjected to state tax.

Proponents of the state tax cuts seek to attribute the budget surplus to the cuts themselves. First, it is impossible to credit the budget surplus to the 2018 state tax cuts, most of which will not take full effect until 2019 and beyond.

Second, even the REC estimates do not predict continued growth at the FY18 levels. Iowa will have already given away the FY18 surplus before the beginning of the next legislative session, because tax cuts mean less revenue. The FY20 budget will be tight. This will steer the legislative discourse to hold down K-12 spending, to push higher-ed costs toward tuition and student debt, and to threaten needed services and institutions — as the administration is doing right now to the University of Iowa Labor Center.

Sustainable budgeting requires realistic forecasts and working to help all Iowans understand the impacts of budget and tax choices. It also means generating adequate revenue to pay for essential services such as education, health care and environmental quality, and helping to create opportunity for all.

[1] Iowa Department of Management, “Iowa budget closes with higher-than-expected revenue, $127 million surplus.” September 2018.

Natalie Veldhouse is a research associate for the nonpartisan Iowa Policy Project in Iowa City. nveldhouse@iowapolicyproject.org

Why not a special session?

Now is the time to be speaking frankly about the longer-term impacts of health care policy — and that might make a special session useful, sooner rather than later.

Long-term impacts could be decided in short order;
Might not our state lawmakers want to weigh in?

If anything has been clear about the current health-care debate in Washington, it is that little is clear — except the likelihood that (1) people will lose insurance coverage and thus access to health care, and (2) this will pose new challenges for state government.

That being the case, it seems a good time for the Legislature to return to Des Moines and sort it out, sooner rather than later. It will be easier for legislators to talk to their federal counterparts about all this before legislation passes than afterward.

Because of the Affordable Care Act (Obamacare), the Medicaid expansion serves about 150,000 Iowans, and would serve an estimated 177,000 Iowans in 2019 if preserved. But those Iowans — and some 55,000 more — would be in jeopardy of losing insurance under legislation pending in the Senate. If the enhanced federal share of funding for Medicaid expansion is reduced or eliminated under any legislation to come — and both the House and Senate bills currently would do this — states would have a choice: Fill in the gap or let people go uninsured.

Oh, and if you’re going to choose to fill in the gap, go ahead and plan now on what will have to be cut to compensate for it. K-12 education, perhaps? Even more cuts to the regents institutions? Child care? Water protection? Law enforcement and corrections?

Already, legislators and Governor Kim Reynolds are facing those kinds of questions amid a looming fiscal shortfall and speculation about a possible special session.

In The Des Moines Register this week, columnist Kathie Obradovich suggested Governor Reynolds “is prudent to wait until fall to make a decision on a special session but that doesn’t mean she should avoid talking about it. Now is the time to be speaking frankly with Iowans and individual legislators, identifying the causes and consulting on potential solutions.”

Now is also the time to be speaking frankly about the longer-term impacts of health care policy — and for that reason, waiting until fall might be too late. Legislative leaders and the Governor right now could be bringing in experts for a special session to discuss the potential impacts, and reach out to the congressional delegation, before decisions are made that restrict state budget choices for many years to come.
Unless, of course, they want to see budget crunches and special sessions more frequently.
Mike Owen, Executive Director of the Iowa Policy Project
mikeowen@iowapolicyproject.org