A mutual friend recently shared an analysis by Mike Lipsman that helps explain why state officials keep missing the mark on revenue projections.  

Lipsman was the top tax analyst at the Iowa Department of Revenue before he retired in 2011. He’s now a partner at Strategic Economics Group, along with former state economist Harvey Siegelman and Iowa State University economics professor emeritus Dan Otto.

The analysis, which Lipsman prepared for a select group of officials and policymakers, traces tax collections and policy changes over the past two decades and concludes that, while the farm economy is an issue, “Iowa’s revenue problem is to a great extent policy driven.”

Lipsman said that 176 tax bills approved by Iowa lawmakers between 2000 and 2016 had the seemingly contradictory effects of increasing Iowa taxpayers’ burden above the national average, while at the same time reducing the amount of money available to Iowa’s general fund, which pays most of the state’s bills.

During a period when many states were lowering taxes, he said, Iowa lawmakers increased taxes by nearly $450 million for purposes not covered by general fund spending, including road improvements and school infrastructure.

But Iowa also effectively reduced payments to the general fund by a total of nearly $700 million in 2016 through a series of sales and use tax exemptions totaling $292 million, business tax credits and refunds worth $131 million, $119 million of cuts to the insurance premium taxes, $99 million by eliminating taxes on Social Security payments, and $57 million by increasing Iowa’s earned income tax credit.  

Those are big numbers, and if the state had collected them, the general fund would have had 10 percent more money than it did in 2016.

But for fiscal year 2017, state officials had to dial back their estimates of tax collections three times for a total of nearly $300 million, or about 4 percent. And they are still expected to miss the final number by somewhere between $50 million and $100 million. We won’t know the exact number until the end of this month when all the bills for fiscal year 2017 are tallied.

It’s unfortunate that state officials have done such a lousy job estimating tax revenue, because Iowa is not in as bad financial condition as you might think from recent news stories about calls for a special legislative session this fall.

Even Lipsman, who argues that Iowa’s tax code is in need of serious repairs, said Iowa’s overall financial position is better than many states that have made more tax cuts than Iowa.  

After noting that “Iowa’s state revenue growth has been very weak over the past two years and prospects for the coming year do not look promising,” Lipsman reported Iowa’s tax growth in 2016 was 2.5 percent.

That was still better than 42 other states. “Sixteen states collected less revenue during 2016 than during 2015, and 26 states had revenue growth of less than 2 percent during 2016,” according to Lipsman’s analysis, which also noted these comparisons between Iowa and other states:

  • “Iowa is much less reliant on business taxes and fees than are all states in the aggregate.” In 2016, he said, business taxes contributed 12.7 percent of all states’ income, but only 8 percent of Iowa’s revenue.
  • On the other hand, Iowa tax collections exceed the national averages in two areas. Gambling revenues were 3.7 percent of total state income for Iowa in 2016, compared with 0.8 percent for all states, and road use taxes from motor fuel and vehicle sales were 14.0 percent for Iowa, compared with 7.9 percent for all states.

In a separate article, Lipsman proposed solutions for Iowa’s revenue problem. I’ll look at those next week.