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Why Does Iowa Have A $1.24 Billion Surplus?

iowa capitol
John Pemble/IPR file

Gov. Kim Reynolds announced Monday that Iowa ended the fiscal year with an extra $1.24 billion, the largest surplus in Iowa history.

“This surplus proves we accomplished exactly what we set out to do — overcome the financial challenges caused by the global pandemic and invest in education, workforce, healthcare, agriculture and technology,” Reynolds said in a statement.

This year’s budget surplus is more than four times higher than the budget surplus in fiscal year 2020. Republicans praised conservative budgeting practices and tax revenues for the excess funding, while Democrats pointed to federal COVID-19 funds.

Here’s a look at why Iowa has so much additional money this year, and what will happen with the funds next.

Why does Iowa have $1.24 billion money left over?

At its most basic level, a surplus occurs when the state takes in more money than it needs to spend or refund to taxpayers. Iowa has recorded a surplus for several years in a row: Fiscal year 2020 ended with $305.5 million left over. The year before, the state had a surplus of $289 million.

But like everything else in our lives, the COVID-19 pandemic complicated the situation.

Fiscal year 2021 began in July 2020 and ended in June 2021. That time period includes most of the COVID-19 pandemic, including several stimulus payments and other federal programs for states.

Ultimately, Iowa brought in $737 million more than analysts expected. Explanations for the sharp increase varied among state government officials.

Reynolds’ spokesperson Alex Murphy put it simply in a Monday email: “Tax receipts came in strong, particularly in sales tax and corporate tax.”

Sen. Tim Kraayenbrink, R-Fort Dodge, credited conservative spending practices for the overall health of Iowa’s economy. He also noted that higher tax revenues in fiscal year 2021 could be explained by federal stimulus payments and the Paycheck Protection Program.

“People were spending that money,” said Kraayenbrink, who serves as chair of the Appropriations Committee. “If you look at our revenue, one of the biggest areas was sales tax.”

Tax revenue was 11.7 percent higher in the past 12 months than it was from August 2019 to August 2020, according to areport by the nonpartisan Legislative Services Agency (LSA). Sales tax revenue grew by 26.7 percent in the same time period.

The LSA attributes the growth to “the low level of economic activity that occurred during the initial months of the COVID-19 pandemic that began in early calendar year 2020, combined with a recent surge in consumer spending financed through pent-up demand and federal stimulus payments.”

Democrat Rep. Chris Hall, the ranking member of the House Appropriations Committee, instead pointed to federal COVID-19 funds that went directly to the state government, potentially enabling the state to allocate fewer state funds.

Hall said that Revenue Estimating Conference meetings earlier in the year revealed that “Iowa’s economy, as well as our state budget, are in a stable position wholly thanks to the support of federal dollars coming into the state.”

Kraayenbrink disagreed, arguing that the federal funds went primarily toward new expenses for the state, like purchasing protective equipment, cleaning or COVID testing. He said individual spending of the stimulus money and other funds made a larger difference to the state’s bottom line.

What happens with the surplus money?

The majority of the extra money — $963.1 million — will go toward the Taxpayer Relief Fund. The money can only be used to fund tax-relief policies, including reducing the income tax rate.

Reynolds told supporters at a weekend fundraiser that she would continue to cut taxes in Iowa, even after the legislature passed a massive tax cut earlier this year.

Another $42 million will go into the state’s reserves. Iowa law requires that the state set aside 10 percent of its annual budget in two reserve funds: the Cash Reserve Fund (7.5 percent of the overall budget) and the Economic Emergency Fund (2.5 percent). With this year’s addition, the state will have $816.8 million set aside for emergencies.

That leaves $233 million for lawmakers to use in fiscal year 2022.

How will lawmakers use the surplus money?

The final $233 million of the surplus will be eligible for lawmakers to use in fiscal year 2022.

Hall, D-Sioux City, identified several areas where he believes the state could be spending more money, such as K-12 education or programs to attract new residents to Iowa.

“We know that to be competitive for years into the future, we need to invest in quality of life,” Hall said. “We need to invest in the things that will help communities continue to hold their population and hopefully grow.”

But Republicans have a trifecta in state government, occupying the governor’s office and controlling both the House and Senate, and they are likely to focus on passing more tax cuts. Kraayenbrink said it’s a fundamental, philosophical difference between Iowa Republicans and Democrats.

“Republicans feel that if the money is in the hands of the taxpayer, the state will benefit and the businesses will benefit more than making a larger government and the government spending that money,” he said.

Do you have questions about the state budget? Email Katie Akin at kakin@iowacapitaldispatch.com.

This article was republished fromIowa Capital Dispatch.