DES MOINES (AP) — Why is Iowa in the position of struggling to pay its bills despite a relatively strong economy? One reason is a major tax cut enacted several years ago on commercial buildings and other properties that sliced hundreds of millions of dollars from the state budget.
Signed into law in 2013 by Republican Gov. Terry Branstad, the largest tax cut in state history has gradually cost Iowa more than $400 million over several years. A separate $300 million will hit Iowa’s main spending fund this budget year, and that cost is slated to be permanent for the years to come.
Democrats and Republicans understood the tax cut’s long-term financial impact when they approved the legislation backed by Branstad, but its consequences have become especially clear this year, as a GOP-controlled Legislature works privately to cover a roughly $110 million shortfall in the $7.2 billion budget that began last July.
Branstad has asked some departments to cut spending to make up the loss, arguing his plan is more strategic than the across-the-board cuts ordered in 2009 by then-Democratic Gov. Chet Culver.
But whereas Culver faced a larger shortfall amid one of the deepest recessions in the nation’s history, Branstad’s proposed cuts come even as Iowa’s tax revenue grows by several percentage points every year.
“This is a pinch right here, and it’s not common,” said Jeff Robinson, a senior analysist for the non-partisan Legislative Services Agency.
So why doesn’t Iowa have enough money? It depends on who you ask. There’s the property tax cut, though Branstad has vehemently defended it and recommended its funding be spared from the chopping block. Spokesman Ben Hammes said in an email the law has “been pivotal for jobs, growth and economic development in all corners of the state.” No comprehensive data is available to back up those assertions.
Branstad’s office has instead focused on another fact: Lower-than-expected state revenue linked to reduced farm commodity prices.
There’s also been a shift in how lawmakers spent extra one-time money in recent years, according to LSA. The leftover dollars can appear at the end of a budget year and typically help plug unexpected expenses for the following year.
Iowa entered its current budget year with a small surplus, after more than $300 million was tapped last year. Those expenses can’t be tied to one thing, though lawmakers did decide to spend $98 million on tax relief to businesses, farmers and other taxpayers buying certain equipment and items. Branstad and Democrats did not initially support the tax cut because of its impact on the future budget. All sides eventually reached a compromise.
Separately, Iowa is expected to dole out about $400 million in tax credits this budget year. The credits pay residents and entities seeking reimbursement on certain purchases. Some of the roughly 40 tax credit programs are decades old, while others were put into effect in the past 10 years. Some have no expiration and others are uncapped, meaning the state must pay up no matter how many people seek the credit.
The tax credits will eat up another $430 million in the budget year that begins in July. That’s more than any other time in Iowa history, according to LSA.
As Iowa lawmakers this week discuss the current budget shortfall, they’ll consider Branstad’s recommendation to reduce spending on departments that oversee corrections, higher education and public safety. Iowa has more than $730 million in two reserve funds, though Hammes said the governor doesn’t believe in using the one-time money for ongoing expenses.
With Republicans holding large majorities in both chambers, Democrats will have little role in balancing the budget, but they have urged lawmakers to be cautious about cutting budgets of critical agencies.
“We should look many places before we’re looking to balance the budget on the backs of students and the elderly and disabled,” said Rep. Chris Hall, a Sioux City Democrat and member of a key spending committee.
Apart from dealing with the current shortfall, Republicans are considering further cuts to personal income taxes or corporate taxes. Although lawmakers haven’t released details, Senate Majority Leader Bill Dix, R-Shell Rock, made clear on the opening day of the session that they should work to cut spending.
“We promised more money back in the pockets of Iowans,” he said. “Money that Iowans have earned and deserve to keep.”
Branstad didn’t include additional tax cuts in his recommendations, noting the budget constraints.