Experts fear GOP cuts could undermine long-term economic growth

Republican lawmakers faced criticism Thursday from Democrats and economists who believe a bill aimed at cutting millions in state services in order to provide tax cuts will only fix short-term problems while creating holes in future budgets.

The bill in question, House File 45, is a broad spending cut bill.  Most prominently, it would eliminate universal preschool funding for four year-olds, make funding cuts at the higher education level, cut funding for family planning services, eliminate a state-funded smoking cessation program and eliminate funding for passenger rail.

The bill would also create a “tax relief fund,” which would “receive one-time excess funds from the Economic Emergency Fund, once the state reserve funds are full,” according to the legislation. Legislative Services Agency officials have pegged $327.4 million going into the fund in the 2012 fiscal year.

Republican leaders maintained the bill — which passed late Wednesday night in the Iowa House — not only will solve long-term budget problems, but will “put a band-aid on the short-term budget problems we’re facing,” Speaker of the House Kraig Paulsen (R-Hiawatha) said.

However, some state economists and analyst groups disagree, saying lawmakers are failing to consider the long-term effects.

“The plan is to take part of the year-end surplus for this tax relief fund. That surplus is normally available for the seceding [fiscal] year,” said Peter Fisher, research director for the non-partisan Iowa Policy Project. “That means taking money that should be funding state services, or should actually be preventing cuts, and putting it into a fund for one-time checks to taxpayers.”

Fisher projected such a move could result in long-term financial problems.

“It seems to me, that taking that surplus without replacing it with revenue is not sustainable for the economy at all,” he said.

Fred Abraham, professor and head of the economics department at the University of Northern Iowa, was skeptical of the proposal.

“Federal tax cuts stimulate the economy, but on the national level, not just in Iowa,” he said. “Tax cuts over in Des Moines won’t stimulate the state’s economy; it’ll just off-set the taxes for the time being.”

David Swenson, an economist at Iowa State University, said state governments are often limited in their options to balance their budgets during recessions.

“State governments must be very careful during recessions, primarily because they do not have the borrowing power the federal government has,” Swenson said. “They must balance their budgets, but for economic growth, it ought to be done in a way that allows essential state services to continue running efficiently, and that means making sure those who need these state services the most are hurt the least.”

Swenson acknowledged the bill “will certainly fix the short-term problems, but there will be long-term consequences,” especially where education and the state business climate — which he said is thriving — are concerned.

“I admit I’m biased about this because I am involved in higher education, but this hacking away at our education spending truly diminishes the state’s long-term competitiveness in the business world,” Swenson said.

“When a state government cuts away at funding to education — particularly to higher education — it sends a very strong signal to businesses, saying education is a lesser concern in that state, rather than a primary one. When a business looks for somewhere to set up, they look at the education of the people there, not tax cuts,” Swenson continued. “By cutting education spending, a state government truly undermines its long-term growth economically.”

Both Swenson and Abraham agreed the business climate in Iowa is thriving, and not because of tax cuts.

“There’s little evidence tax cuts stimulate business growth,” Abraham said. “Businesses increase their profits, but they’re not hiring people; they’re not building new factories. This [legislation] just takes money from workers and gives it to businesses.”

Swenson called suggestions that the state’s tax structure right now is undermining the business growth in Iowa “phony,” adding: “There’s just no evidence of that.”

Paulsen said Thursday he remains confident that the bill will get a fair hearing in the Democrat-controlled Iiowa Senate.

“The Senate will look at it, and obviously, there are parts they collectively accept and parts they collectively oppose,” he said. “Those will be brought up, and we’ll work them out and talk about them.”

When asked if the legislative session would be a constant battle between Democrats in the Senate and Republicans in the House, leaving bills dead in the wake, Paulsen said, “I’m sure that will be the case with some bills, of course,” though did not elaborate about if this applied to House File 45.

Meanwhile, Democrat lawmakers criticized HF45, alleging the Republicans are pushing a social agenda that includes cutting funding to education.

“These were bread and butter issues we dealt with last night,” House Majority Leader Linda Upmeyer (R-Garner) said Thursday morning. “There was nothing to indicate these were social issues or a social agenda. We wanted to take the first step to getting this budgeted aligned and start work for next year’s budget.”

Earlier in the week, Rep. Sharon Steckman, D-Mason City, called the elimination of universal preschool funding, “A job killer that picks on four year-olds.”

Upmeyer said she found Steckman’s comment “confusing.”

“There are multiple ways to send children to preschool,” she said Thursday. “I sent five kids to preschool, (and) I wrote the checks for it.”

Paulsen said the fate of universal preschool “will change, but what the final picture will look like, I do not know at this time.”

Democrats in the Senate have said the battle over universal preschool funding is not over. Though the Senate could potentially introduce their own legislation in response, Senate Majority Leader Mike Gronstal (D-Council Bluffs) said the Senate is currently “evaluating the bill. No determination has been made (on what to do next).”

Upmeyer said bills pertaining to government transparency and voter identification are expected to be debated next week. A joint resolution to allow Iowans to vote on same sex marriage was just assigned to a subcommittee, which is expected to start meeting next week to discuss the legislation, leaders added.