Today’s Revenue Estimating Conference lowered estimates of state revenues by $129.7 million this fiscal year and $269.9 million next fiscal year.

But federal stimulus money, along with reforms to the state’s tax code, could help avoid painful budget cuts, said Beth Pearson, a research associate with Iowa Policy Project, a nonpartisan organization that focuses on tax and budget issues.

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“Layoffs shouldn’t be the first reaction, and it doesn’t have to be,” Pearson said. “I’m not trying to say we’re not in tough times, but the federal stimulus can be put to work to plug these holes. With only three months left in the current fiscal year, where are you going to cut where you expect to save a bunch of money? If layoffs and cuts are first reaction, you’re just digging a hole.”

Deep cuts and layoffs could actually have an adverse effect on the state’s economy, worsening an already tough situation, Pearson said.

“When the public sector cuts back in things that people are really depending on it actually makes the economy worse,” she said.

In December, facing plummeting revenue estimates, Gov. Chet Culver cut 1.5 percent from the current fiscal year budget. In rolling out his budget in January, Culver called for a 6.5 percent across-the-board cut to the budget.

However, with the federal stimulus money now available, Pearson said the state can avoid more cuts that could effect services the public needs, especially during a recession.

“These revenues go to resources people absolutely depend upon. It’s helping people who lose health insurance coverage,” she said. “It’s helping people find work again. It’s making sure there are programs there to help families who can’t make ends meet. The revenue is not just dumped in a bank account, it’s going to Iowa families.”

In the long term, however, stimulus money won’t be the answer to Iowa’s budget problems, Pearson said.

“There are no more excuses for ignoring the revenue side of our budget equation. While the revenue shortfalls highlighted today by the REC are largely due to the effects of the national recession, our weak revenue system — weakened by tax giveaways — has made it harder for Iowa to cope with the recession,” Pearson said.

A recent study by Iowa Policy Project pointed to tax expenditures and credits that the state could alter with little impact on the majority of Iowans.

One example is the Research Activities Credit. Companies are able to receive “refundable” credits for research costs, meaning the credit not only can eliminate taxes owed, but also result in cash payments to companies that pay no Iowa income tax.The state treasury paid more than $30 million to such companies through this program in 2005, with no legislative oversight.

“The ball is now in the hands of the governor and legislature, to make sure the state doesn’t make hasty and unnecessary cuts that can damage the Iowa economy and deny services when they’re seriously needed,” said Charles Bruner, executive director of the Child & Family Policy Center, which partnered with Iowa Policy Project on the study of tax reforms.

However, the initial reaction from most has been that layoffs and deep cuts will be unavoidable.

Senate Minority Leader Paul McKinley, R-Chariton, said the revised numbers indicate that revenues are still coming in at near record levels, which underscores that  “Iowa does not have a revenue problem – we have a spending problem.”

“Because the governor and legislative Democrats refused to budget with restraint like any Iowa family or employer would and instead spend our state far into debt, additional cuts will need to be made,” McKinley said in a statement.

Pearson said the only way to say revenues are at record levels is to compare numbers from previous years without adjusting for inflation to make current amounts look larger.

“It’s a misinterpretation of the situation,” she said. “We’ve seen huge drops in our revenue estimates over the past several fiscal years.”

The legislature must quit dragging it’s feet on spending the federal stimulus money, Pearson said.

“Going with the same response of jumping straight to budget cuts is a mistake we don’t have to make,” she said.

It appears Gov. Culver agrees with that assessment.

“I believe funds from the federal economic recovery plan can maintain our priorities in key areas, such as education and health care, and should help us maintain services to Iowans by avoiding layoffs of public employees,” Culver said.

Culver has two weeks to draft a balanced budget proposal with the new estimates in mind.

“Use the federal stimulus to get us through the short term and reform our tax code to fix the problems long term,” Pearson said. “That’s the message to take away from this.”