While it sounds good in theory, attempts to achieve “smarter, smaller government” with lower tax rates and business incentives frequently have put fundamental services at risk — notably education — while not realizing the promised growth.
As Iowa Republicans carve out a new state income tax code — an undertaking prompted, in part, by changes at the federal level — we are wary that mistaken assumptions that have driven past tax reform efforts will be repeated.
Iowa is one of the few states allowing federal taxes to be deducted on state returns. Consequently, as it stands, the new lower federal tax rates would result in Iowa taxpayers having a higher state bill. In February, the Iowa Department of Revenue estimated the federal tax code revisions would result in Iowans paying nearly $148 million more in state taxes during the 2019 budget year and $192 million in 2020.
Gov. Kim Reynolds and Republicans controlling the Senate and House have vowed they won’t penalize Iowa taxpayers while devising comprehensive state tax reform. Yet the scope of that tax overhaul is cause for concern.
Since 2010, exemptions on sales and use taxes, various corporate tax credits and changes to the commercial property tax valuation were supposed to create an economic renaissance and boost state revenues.
Instead, the state has dealt with midyear budget adjustments at the expense of universities and community colleges, the courts, prisons and human services, while shortchanging K-12 education. To make ends meet, money has been borrowed from reserves.
The federal government doesn’t have to balance its budget. In the aftermath of federal tax reform, the nonpartisan Congressional Budget Office recently warned the federal deficit could exceed $1 trillion in fiscal year 2020.
Regarding the 2017 tax-cut legislation, it stated, “Laws enacted since June 2017 are estimated to make deficits $2.7 trillion larger than previously projected between 2018 and 2027, an effect that results from reducing revenues by $1.7 trillion (or 4 percent) and increasing outlays by $1.0 trillion (or 2 percent).”
The CBO disputes Republican claims that economic growth will surpass 3 percent annually, instead predicting 3.3 percent this year, followed by 2.4 percent and slowing thereafter.
The predicted deficits are not sustainable with the federal debt having surpassed $21 trillion.
If the CBO is right, then entitlement programs could be on the chopping block. Social Security and Medicare alone accounted for 40 percent of federal spending, $1.6 trillion, in FY 2017.
Tax-cut initiatives have been tried and frequently gone awry in the states.
In Kansas in 2012, Republican Gov. Sam Brownback pushed a reduction in the top income tax rate from 6.45 percent to 4.6 percent along with tax exemptions for 330,000 businesses and farmers.
Economic growth didn’t materialize. State revenues in FY 2014 were $700 million less than FY 2013. After school years ended early because of inadequate aid, the state Supreme Court stepped in, ordering a $293 million increase in K-12 funding over two years.
The situation at state prisons was so dire that stab vests for guards were lacking. At one maximum-security facility without air conditioning, the sweaty vests were passed from shift to shift. At another prison, cells designed for one person held three or four. The minimum age for guards was lowered from 21 to 18 to fill vacancies.
Newly elected moderate Republicans and Democrats overrode a Brownback veto to raise $1.2 billion in revenues over the next two years, hiking the top income tax rate to 5.7 percent.
A Democratic governor and Republican Legislature initiated tax cuts in Oklahoma during the past decade that reduced state revenues by 35 percent, according to the Oklahoma Policy Institute. The primary beneficiaries were the wealthiest 20 percent, earning more than $246,000 with a benefit averaging $15,519. The average household got $228.
Growth faltered, albeit amid falling energy prices. Oklahoma led the nation in cutting per-student funding by an inflation-adjusted 28 percent. Some schools resorted to four-day weeks. Teachers ranked No. 49 in pay until a recent statewide walkout resulted in a boost to No. 44.
West Virginia, also with a Democratic governor and Republican Legislature at the time, reduced its corporate tax rate from 9 to 6.5 percent and eliminated its business franchise tax. Growth didn’t occur. Education was gutted. Teachers recently went on a statewide strike demanding raises — and got a 5 percent increase.
Democratic-controlled legislatures have had problems, too. Oregon is a high-tax state with a booming economy, but facing a huge deficit due to rising Medicaid costs and union-driven pensions.
Likewise, Illinois has huge pension obligations, even after its Democratic Legislature passed a tax increase that Republican Gov. Bruce Rauner wants to roll back.
Whatever the culprit may be, fiscal prudence too often is being ignored, endangering public education and other vital government services. We’re wary that these aren’t lessons learned during Iowa’s tax deliberations.