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![Page 1: State Fiscal Forum: Assessing the Fiscal Environment in the Midwest and the Nation Federal Reserve Bank of Chicago and the National Tax Association November.](https://reader036.fdocuments.us/reader036/viewer/2022062713/56649cec5503460f949b87b6/html5/thumbnails/1.jpg)
State Fiscal Forum: Assessing the Fiscal Environment
in the Midwest and the NationFederal Reserve Bank of Chicago and the National Tax Association
November 12, 2003
By Randy BauerBudget Director
State of Iowa
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“Before you go any further, let me reiterate that I, for one, see nothing wrong with killing the messenger.”
Source: Business Law Today, March/April 1998
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Is There Something Different About the Current Budget Cycle?
• More rapid change in revenue performance
• Deeper descent
• Less bounce in the revenue rebound
![Page 4: State Fiscal Forum: Assessing the Fiscal Environment in the Midwest and the Nation Federal Reserve Bank of Chicago and the National Tax Association November.](https://reader036.fdocuments.us/reader036/viewer/2022062713/56649cec5503460f949b87b6/html5/thumbnails/4.jpg)
Rapid Change, Bigger Drop
State Tax Rev enue Has Fallen Far More Sharply Relativ e to Ec onomyThan in 1980-82 and 1990-91 Rec es s ions
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
State F is cal Y ear
Sources : U .S. Bureau of Ec onom ic Analy s is , U .S. Bureau of the C ens us , Signif ic ant Features of Fis cal Federalism -1984 (AC IR ), Fis c al Survey of the States (N GA), R oc kef eller Ins t itute of Gov ernm ent
-8
-6
-4
-2
0
2
4
6
% C
hang
e
R eal GD P per capita, c alendar y ear in whic h f is c al y ear began R eal s tate tax rev enue per capita, adjus ted f or legis lat ion
-7.4
-2.0
-3.0-3.5
-1.8
-0.7
Source: Rockefeller Institute of Government, SUNY
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Iowa: No Revenue ReboundIowa General Fund Revenue Growth
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
17.0%
Fiscal Year
Perc
en
tag
e C
han
ge
Red – Recession
Green – Expansion
Dark Green – Expansion & Tax Increase
Yellow – Expansion and Tax Cut
Mean +5.6%
Source: Iowa Department of Management
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Is Revenue Sufficient to Meet Program Needs?
• Not according to previous history
• Eight successive quarters of no growth (adjusted for tax changes)
• States are enacting tax increases, but Iowa has not
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State and Local Taxes: Out of Sync With GDP
(Percent change)
Source: Global Insight, Inc.
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Eight Successive Quarters of Negative Revenue Growth
State Tax Revenue Adjusted for Legislation and InflationFour-Quarter Moving Average, Indexed to 1994
100
105
110
115
120
125
1994
=100
Source: Rockefeller Institute on Government, SUNY
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Iowa’s Price of Government is Falling
Source: Iowa Department of Management
FY03 state taxes: 6.1% of income - lowest in 33 yearsFY02 state and local taxes: 10.5% - lowest in 17 years
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
FY
72
FY
74
FY
76
FY
78
FY
80
FY
82
FY
84
FY
86
FY
88
FY
90
FY
92
FY
94
FY
96
FY
98
FY
00
FY
02
Iowa tax price ofgovernment: taxes,licenses & permitsas % of personalincome State taxes andfees only
Local taxes andfees only
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States are Raising Taxes
Source: NASBO, NCSL
Enacted State Revenue Changes
-10
-5
0
5
10
15
20
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Fiscal Year
Bill
ion
s o
f D
olla
rs
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Deficits – Structural or Cyclical?
• Magnitude of budget gaps suggests it’s structural
• Problems persist two years after end of recession ………..
• Tax law changes reduce the size of the -----normal bounce back• Demographics may be more of a factor
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A Remarkable Change
• 2000: “How long can the good times roll?” (S&P)
• 2002: “State budgets are .under siege” (NASBO)
• “Nearly every state is in .fiscal crisis” (NCSL)
–$71 billion FY 03 deficit–$78 billion FY 04 shortfall–$200 billion 4-year gap
(Source: NCSL State Budget and Tax Actions 2003)
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Midwest Slow to Recover?
Source: Standard and Poor’s
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How to Protect Revenues and Programs from Volatility?
• Devise tax structures with more reliability, predictability, and sufficiency– Sales tax in an e-commerce and services
economy– Corporate income tax: a ‘voluntary’ tax?– Squeezing counter-cyclical taxes
• Nothing safe in budget firestorms – need reserves as insurance
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Personal Income Outpacing Sales Tax Collections
Iowa Sales Tax per $1,000 Personal Income
$19$20
$21$22$23
$24$25
$26$27
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
Fiscal Year
Sal
es T
ax D
olla
rs P
er
$1,0
00 P
erso
nal I
ncom
e
Source: Iowa Department of Revenue
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Corporate Income Taxes’ Declining Share
Corporate Income Tax Share of All State Taxes
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
1975 1980 1985 1990 1995 2000Fiscal Year
Source: Dr. Peter Fisher, University of Iowa 1975-2000; 2001-2002 data from Tax Policy Center
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Estimated Loss of State Corporate Income Tax Attributable to Tax Sheltering, FY 2001
$0
$100
$200
$300
$400
$500
$600
$700
$800
IA MO WI MI MN IN OH IL
Mill
ions
of D
olla
rs
0%
10%
20%
30%
40%
50%
60%
70%
80%
Loss
as
a Pe
rcen
t of R
even
ue
National Average: -29.3%
Source: State Policy Reports, Multistate Tax Commission
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Decline of Counter-cyclical Taxes
Source: Iowa Department of Management
Iowa Real Inheritance and Cigarette Tax Collections (in millions)
$20
$30
$40
$50
$60
$70
$80
$90
$100
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Fiscal Year
Tax
Co
llect
ion
s Cigarette Tax
Inheritance Tax
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Additional Replacement of Property Taxes with General Fund Revenues
$0
$50
$100
$150
$200
$250
$300
1996 1997 1998 1999 2000 2001 2002 2003 2004
Fiscal Year
Am
ou
nt i
n M
illio
ns
0%
1%
2%
3%
4%
5%
6%
7%
Per
cen
t of G
ener
al F
un
d
Iowa Budget Cuts Reverse Course on Property Tax Replacement
Source: Iowa Department of Management
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1990s Expenditure Growth in Key Areas
Nine of Ten New State Dollars Went to Education, Health, and Corrections
K-12 Education41%
Higher Education7%
Medicaid 32%
Corrections12%
All Other8%
Source: Center for Budget and Policy Priorities
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States Put the Brakes on Budget Increases
Source: NASBO
Percent Nominal Budget Change
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
1996 1997 1998 1999 2000 2001 2002 2003 2004
Fiscal Year
Per
cent
Cha
nge IOWA
ALL STATES
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Do the States Have the Tools to Manage their Budgets?
• State credit ratings would suggest they do
• Generally greater financial attention than 20 years ago
• Tax/expenditure limits can lessen flexibility
• The issue may have more to do with politics …than budgets
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States Built, Rapidly Depleted Reserves
0%
2%
4%
6%
8%
10%
12%
Ba
lan
ce
Pe
rce
nt
of
Ex
pe
nd
itu
res
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Fiscal Year
Source: NASBO
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Source: NCSL, 1999
Half of States Have Tax and/or Expenditure Limits
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A Problem with TELs – Required State Costs Can Outstrip CPI
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Several Factors Motivating Use of Debt
• 9.7% of state and local revenue in 2002– Borrowed $127 billion more than repaid– 3 ½ times the level of 1999
• Borrowed $224 billion during FY 2003
• “Perfect Storm” - Historic low interest rates- Historic late-FY shortfalls- Election year distaste for tax …increases- Keynesian approach to the recession
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Political Will: Revenue Accelerations
• Six states utilizing revenue accelerations in their FY 2004 budget?
• Georgia, Illinois, Kansas, Maryland, Minnesota, Oklahoma
• .Six states with new Governors, party affiliation …switched hands, and ‘I won’t raise taxes’ …campaign promises.• Georgia, Illinois, Kansas, Maryland, Minnesota, …Oklahoma
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