Guest Opinion | Jennifer Krull
Iowa’s Revenue Estimating Conference (REC) has been in the news quite a bit these last several months. Most of the time, the REC quietly meets and projects the budget for the current and coming fiscal years. Usually, the committee is under or about even in its prediction, and not much notice is given to how well it performs its job.
But the slowed growth in tax revenues this last fiscal year has required the REC to reduce the current fiscal year’s budget projection three times. This raises the question: is the REC using the best data possible to make its predictions, and if so, does the state need a new approach to determining the budget for the coming year?
The thing we should understand about this process is that it is a guess, estimate, or projection of what the experts on the REC Board believe is going to happen with our economy, with most of the guessing happening with tax receipts since this is where the bulk of the state’s revenue comes from. If we take the time to review the predictions that have been put forth by the REC, there are a few anomalies that would cause most people to pause and question what they were thinking.
First, let’s start by looking at the prediction of personal income tax. The growth in personal income tax over the last 10 years ranges from -2 percent to a high of 12 percent. The economy is good, and revenue is going up. The problem is the rate at which revenue is growing. The average growth we see year-to-year from FY09 to FY18, using the March 14, 2017, REC data, is 4.1 percent. The average change from FY09 to FY16 from actual revenue is 4.0 percent. So why did the REC project at the October 2016 REC meeting that personal income tax growth for FY17 would be 8.9 percent? The data do not back up this projection! The important note is that personal income tax makes up 63.8 percent of the revenue of the General Fund. Therefore, being off on an estimate can have a huge impact on the budget for the year.
The next largest contributors to the General Fund are sales/use tax and corporate income tax, in that order. Both categories are having similar issues to personal income tax. The average percent change of sales/use tax is 2.8 percent from FY09 to FY18. Yet the October 2016 REC meeting set the growth at 3.3 percent over FY16, and the estimate for FY18 was 3.9 percent.
Corporate income tax is a very volatile category. This area has seen a 32 percent change one year and a 9.7 percent loss another year. When we average the percent changes from year to year, we see the data backs up an average annual growth of 3.2 percent. Yet when we look at the REC’s predicted growth for FY18 in October 2016, the percent increase is 4.4 percent.
We have looked at just the three largest areas of the General Fund. But as you can see, if you are off by just 2 percent in these areas, you are already $100 million off in the Net General Fund, or one third of the approximately $300 million in new money you have to work with. This can have lasting effects on the budgeting process.
How do we avoid the cuts that had to be made this year? If we change our procedure and use the 98 percent rule of forecasted revenues instead of the 99 percent rule, we will be better able to react to these changes. We should only have to use our “rainy day” funds in the event of a major recession or some unforeseen disaster, not handling poor predictions. But the important takeaway is that our revenues are growing. The REC just needs to do a better job of predicting what that growth will truly look like.
Jennifer L. Crull is a specialist with Public Interest Institute, Muscatine. Contact her at Public.Interest.Institute@LimitedGovernment.org.