Politics likely to thwart budget solutions

Democratic leaders in the Iowa Legislature last week issued spending targets for a $5.3 billion state budget, nearly $261 million less than the current year. With those targets in hand, seven budget committees began work this week to develop the fiscal year 2011 budget, which begins July 1.

But despite high hopes and big promises, economists and policy analysts say election-year politics make it unlikely lawmakers will make the tough decisions needed to correct the state’s finances.

“The path of least resistance is certainly going to be very appealing to lawmakers,” said David Swenson, an economist at Iowa State University. “Not making a decision is extremely appealing if you can get away with it.”

Lawmakers started the year with a budget gap of about $1 billion. They say that gap has already been shrunk, thanks to $250 million in savings associated with an early-retirement package, government reorganization legislation and a cost-cutting executive order signed by Gov. Chet Culver.

The governor has also requested the state tap more than $250 million from its cash reserves.

But state agencies are sure to see more cuts before the budget is finalized, and state employees could find themselves out of work, as lawmakers search for ways to balance the budget without raising any taxes, something Culver and Democratic legislative leaders have vowed to avoid.

“To rule out any sort of revenue enhancement from the beginning for fear of a backlash at election time is I think nothing short of irresponsible,” Swenson said. “Legislators should not act like they are victims of the budgetary process or victims of the economy. There is an active role for government in this, but unfortunately the idea of getting re-elected prevent them from doing the sort of aggressive administrative and legislative activities during an election year.”

State Sen. Jack Hatch, D-Des Moines, co-chair of the health and Human Services Appropriations Subcommittee, told the Cedar Rapids Gazette that DHS could see 250 to 400 fewer positions in the new budget, thanks to state targets that are $172 million less than the current year and an expected drop in federal Medicaid funds of around $379 million.

So as lawmakers look at the possibility of draconian cuts to state agencies, Swenson said everything should truly be on the table, including an income tax cut passed more than a decade ago.

Ten percent tax cut

In 1997, a Republican-controlled legislature passed, and then-Gov. Terry Branstad signed, a 10 percent across-the-board cut in state income taxes. At the time, the Legislative Fiscal Bureau estimated that the cuts would reduce state revenue by about $200 million annually, meaning Iowa’s economy would have to grow at a nearly 6 percent annual rate to avoid red ink.

By 2001, some lawmakers began questioning whether the tax cuts should be revisited in the wake of growing deficits and a weakening economy. A study of the tax cuts that year by the Iowa Policy Project, a nonpartisan think tank, found that because of an earlier increase in the sales tax, 80 percent of the state actually paid more taxes after the across-the-board tax cut. The top 1 percent of Iowa families, who earned an average of $476,000, saw their income tax drop $2,539 while the poorest 40 percent of Iowa families paid anywhere from $12 more in taxes to $72 more.

“Those tax cuts really locked us in to one heck of a tough couple of years of budget stress during the Vilsack administration,” Swenson said. “I think that state government should rethink those cuts and shift that individual income tax rate back upward.”

A more recent study of Iowa’s tax code found  that Iowa families earning less than $20,000 a year — the poorest fifth of Iowa non-elderly taxpayers — pay 11 percent of their income in state and local taxes. Middle-income families — those earning between $37,000 and $56,000 — pay 10 percent of their income in Iowa state and local taxes.

The richest Iowa taxpayers, with income averaging $989,200, pay 7.4 percent of their income in state and local taxes.

David Osterberg, executive director the Iowa Policy Project and a former Democratic state lawmaker, said a recent poll commissioned by his organization found six in 10 voters favor some increase in taxes and fees rather than cuts alone to balance the state’s budget. Those figures are similar to a recent Des Moines Register poll which found 48 percent of Iowans said lawmakers should consider raising state income taxes by a half percentage point; 51 percent said they believe a 1-cent increase in the state sales tax should be considered or strongly considered.

Brinn Shjegstad, director of the non-partisan Iowa Policy Institute and a former Republican activist, said to think of raising taxes during an economic downturn is fiscally irresponsible.

“I think that if you start putting burden on those that are employing others and those that are putting money into the economy that is going to stifle the economic growth here in Iowa,” she said. “If you start considering raising taxes on anybody when people are already cutting back, you’re not going to see a positive impact on the state economy.”

Osterberg said there is little worry of that taking place, since lawmakers are hesitant to consider any tax increase during an election year. He pointed to an increase on registration fees for vans passed by the legislature in April 1992. By the fall, Republicans had captured control of the state House for the first time in 10 years.

“Vans had been called a truck and getting some low registration fee,” he said. “That was changed by a Democratic legislature, and that might have unelected the Democratic Party that year, or at least that’s what everyone said. The van tax did it.”

Tax credits

In the wake of allegations of misconduct involving tax incentives designed to lure filmmakers to the state, a panel of top state officials proposed capping most of the tax credits offered by state government and eliminating several more deemed to be ineffective.

“They need to look at some of these unreasonable tax breaks, and we’ve been saying this year after year after year,” Osterberg said. “And only because of the fiasco surrounding the Iowa Film Office, they are taking a look at this at least.”

Business assistance tax credits increased from $144.3 million in FY2006 to $242.7 million in FY2008.

“Once enacted, these business tax credits are not subject to annual reauthorization and can grow well beyond their intended size and for activities well beyond their intended purpose,” Osterberg said.

While many argue that the tax incentives make the state more inviting to businesses, and thus create jobs, Osterberg said when it comes to economic development, the state must prioritize, and there is no better investment than money for education. State regents universities are budgeted $102 million less than they are receiving this year. Community colleges will get $21 million less.

David Osterberg of Iowa Policy Project

“That has the biggest pay off, whether it is Regent schools, community colleges or K-12, that is what we should be doing,” he said. “But yet they are making cuts in these areas because they won’t rein in some of these tax cuts or tax credits.”

He’s still hopeful that some action will be taken by lawmakers to deal with the state’s ballooning tax credits, but again, election year politics make it difficult.

“Part of their reluctance is that if you did something about tax credits, people would frame that as a tax increase,” Osterberg said. “If you took away a tax credit for Rockwell Collins, for instance, or some big prestigious Iowa company that everyone likes, your opponent is going to make the argument that you raised taxes.”

A corporate-friendly climate

Shjegstad shares the opinion that the reality of an election year will stall meaningful solutions to the state’s budget crisis.

“I think lawmakers work so hard to try to avoid making anyone angry they end up making everyone angry,” she said. “And that’s true today at the state and federal level.”

Cuts and reorganization alone won’t go far enough to fix the state’s budget and economy, Shjegstad said. The legislature should make creating a more friendly business environment its number-one goal, and that includes reducing or eliminating the corporate income tax, lowering overall property taxes and avoiding any tax increases.

As for where government could cut, Shjegstad said lawmakers should do what Iowa families have been doing.

“Assess where your spending is, assess what your priorities are, what your necessities are, and from there you make cuts on what isn’t vital at this time,” she said. She points to the Iowa Power Fund, which gives financial assistance to those conducting business and research in Iowa that promote energy independence, as a good candidate for elimination.

“Is it doing what it is supposed to be doing?” she said. “Is that a worthwhile investment?”

Osterberg, on the other hand, thinks lawmakers must look at programs that benefit lower-income Iowans.

“The easiest thing is you give money to poor people because they spend it,” he said. “It’s not that I like poor people more than I like myself or some rich person, but I know if I get $250, some of it is going in the bank. You give somebody on food stamps money, they are going to spend it.”

Ultimately, Osterberg, Shjegstad and Swenson all agreed that these issues aren’t going away any time soon, and will likely be the focus on next year’s legislative session as well.

“The reality is that revenues are incredibly constrained and the outlook is just simply dismal,” Swenson said. “I don’t see indicators out there that say there is a surprise waiting around the corner. And even after the economy finally starts to recover, the government waits a year before it starts to extend programming again. We’re looking at a lean two years, at least.”