Iowa policymakers are facing a problem because revenues are not rising as predicted by the Revenue Estimating Conference (REC). If this continues, the Legislature must fill the budget from the reserves. “We are still a state that’s seeing growth in revenue, although it’s not as robust as we had projected…We have over $600 million in our economic cash reserves…,” stated Governor Kim Reynolds in a press conference. Iowa is in need of economic growth that will not only create more economic opportunities for Iowans, but also bring more stability to state finances. To achieve this goal, Iowa policymakers must enact tax reform and reform state spending by following priority-based budgeting.
Several states across the nation are struggling economically. States such as Illinois, Connecticut, and California are in fiscal turmoil. At this time, Iowa is more economically stable than our neighbors in Illinois, but we are starting to see some warning signs. Iowa’s problem is that we are spending too much.
To address spending, the Legislature should consider priority-based budgeting. In explaining priority-based budgeting Jonathan Williams, Chief Economist at the American Legislative Exchange Council, wrote: “Policymakers should consider adopting the priority-based budgeting model to determine how to provide core government services while rooting out waste and protecting against overspending. This approach was successful on a bipartisan basis in Washington State, saving taxpayers more than $2 billion in the process.”
In addition to priority-based budgeting, Iowa policymakers must consider tax reform. The issue of tax reform was sidelined during the 2017 legislative session, but Legislators cannot delay tax reform any longer. Iowa policymakers should not be scared away from tax reform because of the lower than projected revenues.
North Carolina is currently setting an example many state policymakers are following. Policymakers in North Carolina not only faced a budget crisis, they resolved the crisis and enacted major tax reform. “North Carolina provides us a clear example of the constructive effects of pro-growth tax reform and budget prioritization. Despite being handed a $3 billion budget gap for the 2011-12 fiscal year, North Carolina’s General Assembly took great strides in repairing the ailing budget and its structural problems, all while providing substantial tax relief,” noted Jonathan Williams.
The North Carolina tax-reform measure reduced the state’s corporate tax rate, abolished the estate tax, and created a flat income tax. The corporate tax rate in North Carolina went from 6.9 percent to 4 percent, and it will eventually fall to 3 percent in 2017. In addition, the personal income tax rate was 7.75 percent and is scheduled to be lowered to 5.499 percent in 2017. The North Carolina Legislature is currently considering further tax reform by lowering the individual income tax to 5.25 percent.
Because of the budget and tax reforms North Carolina’s economy is growing, they have maintained a AAA bond rating, and the budget is experiencing a $580 million surplus. Tax reform along with fiscal prudence is resulting in the economic growth in North Carolina. Policymakers must remember that tax cuts do not automatically pay for themselves and spending must be controlled to avoid budget deficits. Nevertheless, tax cuts do provide a fiscal stimulus and can create additional revenues.
Iowa policymakers can learn from North Carolina’s example. Priority-based budgeting along with prudent tax reform will create an opportunity for Iowa’s economy to grow and keep the vital functions of the state government funded. States that are following limited-government policies of low tax rates and prudent fiscal policies are doing the best economically.