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Iowa is expected to bring in less revenue this year as tax cuts take effect

Iowa capitol building reflection
John Pemble
/
IPR
This latest estimate gives Gov. Kim Reynolds about $9.5 billion to work with in crafting her proposed budget for the next fiscal year.

Iowa will bring in a bit less state revenue this fiscal year compared to last year as sweeping, Republican-backed tax cuts start to take effect in January, according to the state’s Revenue Estimating Conference.

The panel estimated Wednesday that Iowa will see a 1.9% drop in state revenue this fiscal year, which ends June 30, 2023.

Department of Management Director Kraig Paulsen said that’s largely due to the elimination of state taxes on retirement income, which takes effect Jan. 1.

The top personal income tax rate will also drop from 8.53% to 6% on Jan. 1, and the top corporate tax rate will fall from 9.8% to 8.4%. All of these tax changes combined are expected to contribute to the decline in state revenue. Typically, state revenue is expected to grow each year.

Republican Gov. Kim Reynolds said in a statement Wednesday that reducing state revenue through tax cuts was intentional.

“December’s REC projections confirm that we are achieving our goal of correcting the state’s overcollection of taxpayer dollars and returning it to hardworking Iowans,” Reynolds said. “The historic tax cuts I signed into law earlier this year will begin to take effect in a few weeks, and as planned and expected, the projections show a slight dip in the state’s revenue. However, our state’s budget remains robust, and we continue to invest in key priorities to benefit all Iowans.”

In the next fiscal year, revenue forecasters predict revenue will be about the same as this year.

Personal income tax rates will keep getting cut each year until 2026, and the top corporate income tax rate will also be ratcheted down over time. The cuts are expected to cost the state nearly $2 billion total when fully phased in in 2026.

Most Democratic lawmakers opposed the tax cuts, and they said the dip in state revenue is a warning sign for Iowa’s economy.

“Due to the tax giveaways to Iowa’s largest corporations and millionaires last session, Iowans will have less services that they depend on this year,” said Rep. Timi Brown-Powers, D-Waterloo. “Every dollar Republican politicians hand over to corporations and millionaires puts Iowa families, our public schools, and our kids at risk.”

The panel’s December estimate is what the governor uses to craft a proposed state budget to be considered in the upcoming legislative session.

This estimate gives Reynolds about $9.5 billion to work with. But in the past two years, Reynolds and the Republican-led legislature have spent far less than that on state services, leaving a large budget surplus.

Paulsen, who represents Reynolds on the revenue forecasting panel, also said the state is still “overcollecting” money from Iowans. He said there is enough money for lawmakers to cut taxes even more if they want to.

“I have no concerns about meeting the obligations the state has and meeting the priorities they have with regard to state spending,” Paulsen said.

Reynolds is expected to release her budget proposal on Jan. 10.

Panel members say there’s no sign of an economic recession in Iowa

The Revenue Estimating Conference members said Wednesday there is no sign of a recession yet in Iowa. But they said the current state of the economy makes it very difficult to predict what will happen.

“While there are no telltale signs of a future recession, many economists indicate that the 2023 economy may have a difficult time,” said Jennifer Acton, who represents the Legislative Services Agency on the panel.

Acton and Paulsen said Wednesday that Iowa’s key economic indicators continue to be strong and don’t suggest a downturn at this time. On Thursday, Iowa Workforce Development announced Iowa’s unemployment rate increased to 3.1% in November.

Paulsen said if there is a recession next year, the state of Iowa is in a good financial position to get through it.

“Overall, the state is in an incredibly strong financial position, and is well situated to manage whatever future circumstances dictate,” Paulsen said. “I continue to be optimistic that any downturn will be weathered, and at least in Iowa it will be shallow and relatively short in length.”

Paulsen said historically, Iowa’s economic highs and lows have been muted compared to the rest of the country.

Katarina Sostaric is IPR's State Government Reporter