Common Good Iowa

A word of common sense, good math and community

Posted on June 12, 2024 at 3:51 PM by Anne Discher

Iowans’ skills, labor, spending and innovation power our economy. Policy solutions that put people’s well-being first offer a pragmatic path to prosperity. Those include wise investments in our communities supported by taxes — with the wealthy and corporations paying their fair share.

Ignoring common sense and basic math, tax-cut promoters in our state have repeatedly dismissed concerns about Iowa’s ability to sustain adequate public services in the face of  repeated rounds of tax cuts. The most recent cuts, in April, were our state’s fourth in six years. Last week, a new policy group came to proponents’ aid. The Iowa branch of the Common Sense Institute (CSI), founded and staffed mostly out of Colorado, released a report defending the April tax cuts with an upside-down representation of what powers the Iowa economy.

The CSI report defended the cuts based on the debunked notion that their benefits, overwhelmingly skewed to the wealthy (chart), will ultimately trickle down to the rest of us and grow the economy. History has repeatedly shown the folly of this approach — nationally with Reagan-, G.W. Bush- and Trump-era cuts driving up debt and inequality, and in Kansas a decade ago, where lawmakers ultimately had to undo draconian tax cuts when promised economic growth failed to materialize and state revenues tanked.

Iowans should be skeptical of the new report’s findings. Here are some cautions:

  • Even if you take its analysis of the 2024 tax cuts at face value (read on for why that’s not a given), the report’s claims of economic impact are modest at best.

    • It claims that over 10 years the economic stimulus resulting from the tax cuts will offset $120 million of nearly $1.8 billion direct state revenue loss. That figure represents not even 7% of the total lost revenue.

    • It claims the tax cuts will generate $1.72 billion in GDP growth over 10 years — the equivalent of less than 1% of one year of the state’s $249 billion economy.

    • It claims the cuts will create 7,300 new jobs in 2025. In a state with about 1.3 million private-sector workers, that equates to about a half-a-percent increase in employment — at a cost of nearly $125,000 per job in lost state revenue.

  • The CSI report ignores the economic growth that comes from public investments. Authors of a Georgia State University review of dynamic state revenue analysis, using the same tax model as that by CSI in its report, noted that although the evidence shows that tax cuts in some instances contribute modestly to state economies, “[t]axes cannot be considered in isolation. Taxes pay for something, and many of the services state governments provide can have just as much impact on the economy as taxes.” Dollars cut from the state budget are no longer available to pay teachers, reimburse local health providers for services through Medicaid or hire workers to tackle deferred maintenance at state parks.

  • To the extent the report outlines its modeling assumptions, they are notably rosy. CSI employs a “dynamic” forecast to claim that ripple effects of the tax cuts will reduce the level of resulting revenue reduction. But much of its analysis, using a modeling approach that amounts to a black box, is hard to parse because the CSI report offers limited documentation of the assumptions informing the analysis. Where it does, it reflects supply-side, or trickle-down, theories that the wealthy people and companies who receive the biggest tax breaks will put practically all that money back into the economy — a precarious assumption.

  • CSI chooses to miss the larger revenue damage from recent tax cuts by only focusing on the 2024 bill, which merely piles deeper cuts on the bigger package passed in 2022. According to Iowa’s Legislative Services Agency, together, beginning in FY 2026, those bills alone will reduce annual state revenue — for public schools, health care, water protection and other critical services — by nearly $2 billion a year, the equivalent of over 20% of the current year’s budget.

  • CSI projections assume the state will increase spending at its recent historical rate of 3% (inflation, more or less), ignoring the inadequacy of our current investment in Iowans via public services. In fact, we have clear unmet needs. Take education funding, which already has been held down below needs and costs for over a decade, and now must be stretched to cover a costly and unaccountable voucher system. Schools need more, not static or fewer resources, in this post-pandemic period when our schools are struggling to meet the needs of students in the face of rampant chronic absence and declining reading and math proficiency.

Iowa lawmakers have created big one-time budget surpluses by holding down investments in services when revenues were strong, thanks to a healthy state economy boosted by federal recovery aid. That allows them and their political enablers to paint a prettier picture to sell tax cuts and push out the damage. But those surpluses are temporary, and when they go away, the consequences will be permanent. The math doesn’t need to be hidden in a black box; it’s simple.

Anne Discher is executive director of Common Good Iowa.
Mike Owen is deputy director of Common Good Iowa. 
Sean Finn is a policy analyst at Common Good Iowa. 

Categories: Budget & taxes

Tagged As: Budget cuts, Income tax

The graphs provided by CSI to the media show that they are relying on expenditures increasing by only 3% per year for the foreseeable future. As my own analysis has shown, mostly based on expenditure calculations provided by the nonpartisan Legislative Service Agency, K-12 public school aid in this last school year fell $528 million behind inflation as compared to when Reynolds took over. If you add in the community colleges and the regents universities, the total inflation-related shortfall comes to $685 million in FY 2024 alone. Both figures will grow in the next fiscal year. To make up that education shortfall would have required an additional 7.7% increase in the state's general fund budget for FY 2025. Suppose one were to add the 7.7% catch-up expenditure for FY 2025 to the expenditure line in the CSI graphs. If one then maintained from there on their 3% annual increase, the corrected CSI graphs would show future annual deficits as far as the eye can see. It couldn't be clearer from the analysis of the right-wing, tax-cut advocacy group itself. The fiscal viability of the Republican tax cuts is dependent upon and will be paid for by a permanent reduction in real education support.
Senator Herman Quirmbach, Ph.D. | 6/13/24 at 2:11 PM
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