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June 2016 Brief: Volume 23, Number 17

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Iowa Budget and Fiscal Policy: The Need for Bolder Policies

 

by John Hendrickson

 

 

Once again, Iowa’s divided state government proved problematic as the 2016 Legislative session ended. Some of the large issues that confronted Legislators included school funding, Medicaid provisions, water-quality initiatives, and spending on infrastructure, as well as social issues ranging from medical marijuana, funding for Planned Parenthood, ‘death with dignity,’ and issues revolving around gun rights.[1] In regard to the budget, the Legislature compromised on a $7.3 billion budget for the new fiscal year, and although some limited taxpayer victories were achieved in the session, more needs to be done.

 

Iowa, just as with other states and the federal government, faces a fiscal challenge dealing with greater demands for government services. This is certainly true with the growing costs of programs such as Medicaid and other areas such as education, transportation and infrastructure, and environmental issues. Although Iowa’s fiscal health is relatively in a lot better shape than other states, it is time for state policymakers to consider some pro-growth measures. Before looking at some policy ideas, a breakdown of the Fiscal Year (FY) 2017 General Fund budget is needed to see where taxpayer dollars are being spent. The $7.3 billion budget will be divided based upon the following:

 

•State Aid to Schools: $3,175,600,065 (43.20%)
•State Universities: $601,468,864 (8.18%)
•Community Colleges: $204,790,605 (2.79%)
•Medicaid and Mental Health: $1,318,246,446 (17.93%)
•Other Department of Health and Human Services: $432,668,039 (5.89%)
•Property Tax Credits: $482,436,698 (6.56%)
•Corrections: $385,055,323 (5.24%)
•Rest of State Government: $750,359,067 (10.21%)[2]

 

Education and Medicaid continue to be the driving costs of the budget. The funding for state aid for school districts was one of the more divisive issues facing the lawmakers. The compromise was a 2.25 percent increase. Overall, K-12 education spending, along with spending on higher education, consumes over half of the state budget, while Medicaid consumes almost one-fifth of the budget. In fact, in 2016 the total cost of Iowa’s Medicaid program, including the share of the federal government, was around $5 billion. The amount of tax dollars needed to fund these programs demonstrates why reforming these programs is so essential.

 

From a tax perspective, Legislators came to a compromise over tax coupling, which “allows farmers, business owners, and some others to write off up to $500,000 of certain purchases,” which will be a benefit to Iowa’s economy.[3] The compromise over coupling was a one-year compromise, so it fails to provide certainty for the business community.[4] State policymakers need to consider some pro-growth tax reform ideas such as lowering the state corporate income tax, which is the highest in the nation. Iowa’s high rates do not help in attracting businesses to our state. Iowa’s policymakers should look at other states as examples, such as Kansas and North Carolina, both of which instituted across-the-board tax reductions.[5] In fact, states that have lowered tax rates and kept spending levels lower have seen greater economic growth. Other ideas that policymakers could consider include eliminating the individual income tax and creating a bi-partisan commission to evaluate state government programs and make recommendations to prioritize spending and what programs can either be privatized or abolished altogether. As noted economists Arthur Laffer, Stephen Moore, and Jonathan Williams wrote:

 

States can no longer afford to stand still and hope their existing economic policies will be good enough to bring in new residents, jobs, and capital. The economic competition among states is fierce, with many Governors proposing significant tax cuts and other pro-growth reforms and Legislatures looking for any advantage they can gain over other states to provide a more favorable business climate. As the research shows, people and businesses are moving to states that are willing to let them keep more of their own money and provide them with more economic freedom. This trend is changing the distribution of population and wealth across the nation, leading some states to new prosperity and others to economic decline.[6]

 

This is the reality that Iowa is confronted with, and it will be especially challenging for rural Iowa in regard to economic growth. To stay competitive among the other 49 states, Iowa will need to embrace low marginal tax rates and maintain lower levels of spending, but as the budget demonstrates this will be difficult with the escalating costs of education, spending on health-care services such as Medicaid and mental health, and funding our infrastructure.

 

In her closing remarks of the Legislative session, Speaker of the House Linda Upmeyer offered some objectives that the Legislature should consider next session:

 

Looking forward, we should look to reform the state’s tax code and make it more competitive with other states. We should give parents a choice in the education of their children and look for ways to free the hands of educators in our public schools. We should expand on the criminal justice reforms we achieved this year that focus efforts and resources on dangerous criminals rather than nonviolent offenders. We should continue to encourage innovation in our high schools and community colleges to grow a highly skilled workforce that employers can depend on for the jobs of the future. Finally, we should change the conversation from how much we are allowed to spend, to how much we should spend. We should value each and every dollar that the hardworking taxpayers send us each year.[7]

 

Endnotes:

[1] William Petroski and Brianne Pfannenstiel, “Who won? Who lost? Iowa Legislature heads home,” The Des Moines Register, May 2, 2016, <http://www.desmoinesregister.com/story/news/politics/2016/04/29/who-won-who-lost-iowa-legislature-heads-home/82654494/> accessed on May 18, 2016.
[2] “FY 2017 General Fund Budget: By Function,” chart provided by State Representative Tom Sands to Author, May 18, 2016.
[3] Petroski and Pfannenstiel.
[4] Ibid.
[5] For more information on the Kansas and North Carolina tax policies see Arthur B. Laffer, Stephen Moore, and Jonathan Williams, Rich States-Poor States: ALEC-Laffer State Economic Competitiveness Index, 8th edition, American Legislative Exchange Council, Washington, D.C., 2015, <https://www.alec.org/app/uploads/2015/10/RSPS_8th_Edition-Final.pdf> accessed on May 18, 2016.
[6] Ibid., p. 16.
[7] Speaker of the House Linda Upmeyer, “Sine Die,” Under the Golden Dome, Too, Speaker Upmeyer’s Weekly Newsletter, May 3, 2016, <http://www.iowahouserepublicans.com/speaker-upmeyers-weekly-newsletter-15#more-27370> accessed on May 18, 2016.

 

John Hendrickson is a Research Analyst with Public Interest Institute, Mount Pleasant, Iowa.Contact him at Public.Interest.Institute@LimitedGovernment.org.

 

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