Republican elected officials are sending a mixed message about Iowa’s finances. Before the 2011 legislative session began, Republicans were outraged about a so-called “unaffordable” union contract that would give state workers modest raises, at a cost of about $100 million a year for two years.  Barely a week into the session, a party-line Iowa House vote approved a broad “deappropriations” bill, in which about a third of the savings came from cutting Iowa’s preschool grant for four-year-olds. The universal voluntary preschool program was expected to cost $70 million to $75 million per year (according to Legislative Services Agency estimates), or up to $90 million by some other estimates.

Since then, House Republicans have passed House File 185, which allows zero growth in K-12 education budgets for the next two fiscal years. That was an unprecedented move. In nearly 40 years, the Iowa legislature has never approved less than 1 percent allowable growth for school district budgets: not during the farm crisis, not during the recessions and budget crunches of the early 1980s, early 1990s, 2001-02 or 2009-10. Now, we are told, our dire fiscal condition doesn’t leave any room to spend $65 million to allow school districts to increase their budgets by 2 percent.

Yet on February 16, the Iowa House approved House File 194 on a mostly party-line vote. The bill would cut Iowa’s individual income tax rates by 20 percent, which the Legislative Services Agency estimates would cost $330 million during fiscal year 2012 and more than $700 million in each of the next three fiscal years.  How Iowa can afford that loss of revenue and what services would be cut to keep the budget balanced, House Republicans don’t say.

Meanwhile, Governor Terry Branstad plans to lay off hundreds of state workers to cut labor costs and sent state legislators a draft budget with no allowable growth for K-12 schools for two years. This week Branstad offered a preschool plan that would support fewer children at a lower cost ($43 million per year). He and his Department of Education director, Jason Glass, have repeatedly said Iowa cannot afford to continue the preschool program as currently structured. Yet Branstad’s plan to cut corporate taxes in half would deprive the state of at least $100 million in revenues. He has proposed about $450 million in commercial property tax cuts, with the idea that state government would reimburse local governments for much of that lost revenue. If our budget constraints are so severe, how can we afford those policies?

More context on the state budget is after the jump, along with details on the Iowa Senate’s resistance to Republican tax and education funding proposals.

Iowa has gone through a few tight budget years, but it’s important to remember that our fiscal condition is strong, especially compared to other states. Iowa is expected to end the 2011 budget year on June 30 with a surplus of $496.5 million, plus several hundred million more dollars in the state’s reserve accounts. According to a recent Center on Budget and Policy Priorities report on state budgets, 44 states and the District of Columbia are projecting budget shortfalls for the 2012 fiscal year. Table 1 lists states and the size of their projected budget gaps. The gap Iowa legislators need to close in the 2012 budget is $294 million, or 5.6 percent of the current year’s budget. At least three dozen other states face gaps that are far larger as a percentage of their annual budget.

Moreover, the Center on Budget and Policy Priorities report probably overstates the challenge for Iowa lawmakers as they craft a balanced budget for the coming year. The Iowa Legislative Services Agency projected in December “that $263 million in adjustments are needed to balance the 2011-2 budget.” Since then, Congress extended the Bush tax cuts for all income levels, which will generate approximately $140 million in additional tax revenue for Iowa. (A lower federal tax burden means higher-income Iowans will be able to deduct less from their state tax liabilities.)

Iowa has encountered periodic budget crunches since the 1970s, but as I mentioned above, never before has the legislature passed zero allowable growth for Iowa school districts. Because certain education and labor costs are bound to rise during the next two years, a no-growth mandate from the legislature will prompt many school districts to cut programs and lay off staff. Unlike in 2009 and 2010, there will be no federal stimulus money to soften the blow to K-12 education budgets. Senate Democrats surveyed superintendents from around the state about zero allowable growth. Of the 259 respondents, 88 percent said they would lay off some school staff, 84 percent said they would lay off teachers, 81 percent of districts might raise property taxes, 66 percent would eliminate some course offerings and 59 percent would cut extracurricular activities.  When the House Education Committee approved zero allowable growth on a February 1 party-line vote, ranking Democrat Nate Willems warned that the plan would “raise property taxes by $70 million, increase class sizes, and make it more difficult for rural schools to avoid consolidation.”

It’s one thing to ask school districts to manage with no allowable growth under doomsday budget scenarios like what California and Nevada are facing. But Iowa lawmakers need not resort to desperate measures. State Senate Education Committee Chairman Herman Quirmbach denounced Republican talk of a budget crisis as a “hoax”:

Quirmbach said the Iowa Preschool Program, announced by Branstad Monday morning at a Statehouse news conference, short-shrifts public preschool and continues “a generalized attack on public education” by the governor in a two-year budget proposal calling for zero allowable growth for public schools and a 6 percent in higher education, cuts that Regents institutions warn could prompt 12 percent tuition hikes.

“I’d like to give the other side the benefit of doubt but when proposal after proposal after proposal comes through and it’s all cuts, how do you explain this except to say that they don’t care about public education?” Quirmbach said.

“Our economy is coming back, and there is no reason for drastic budget cuts. We can’t afford to be generous, but there’s no reason to panic, and we can afford this,” he said. “This whole business about an alleged budget crisis is, I’m sorry, a hoax, and the only reason you would propose this is to be able to give gigantic tax breaks.”

About those tax breaks: Peter Fisher of the Iowa Fiscal Partnership has blown apart the case for corporate income tax cuts, showing that Iowa’s business taxes are already low by national standards. The Des Moines Register’s Donnelle Eller reported this week that large firms, not small businesses, would benefit most from the corporate tax cuts:

About 885 businesses, with sales over $25 million in Iowa, paid 65 percent of the state’s corporate taxes in 2008. That’s $142 million of nearly $219 million paid, Iowa Department of Revenue data show.

In addition, the data show the biggest corporate taxpayers are large retailers with sales outside the state. Iowa taxes companies only for income earned within the state.

Branstad has said small businesses would benefit the most because most of their sales – and income – are within the state.

But data from a state report show the 22,000 companies that have sales exclusively in Iowa contributed just 19 percent of the revenue collected via the state’s corporate taxes. That was about $41.6 million in 2008. […]

Iowa State University economist Dave Swenson said “it’s very unclear to me how this tax cut would create significantly more jobs in Iowa.”

Swenson said the proposed tax would be “very beneficial to a lot of large retailers and service firms that serve Iowa demand.”

“But cutting the corporate tax rate isn’t going to create more of those firms,” he said. “And for those large firms we want to attract – the Googles, IBMs, the Microsofts, companies that produce for a worldwide market – it’s a meaningless tax cut because they already do not pay very much Iowa corporate tax,” given that their sales and services are mostly sold outside Iowa and avoid state tax.

This week the Iowa Fiscal Partnership analyzed the proposed 20 percent individual income tax cut in House File 194:

HF194 provides yet another windfall primarily for the wealthiest. According to an analysis by the Institute on Taxation and Economic Policy, the effect of the tax cut will average $18 for taxpayers in the lowest quintile of Iowa taxpayers (with incomes below $21,000) and $6,822 for taxpayers in the top 1 percent of Iowa taxpayers (with incomes of 358,000 or more (See Table 1).

While the bottom one-fifth of Iowa taxpayers see their overall taxes (sales, property and income combined) reduced by about 1.6 percent, the top 1 percent see their overall tax burden reduced by about 9.3 percent. Further, a disproportionate share of those in the top 1 percent of income are out-of-state tax filers who made profits in Iowa and they (or their home states) would be big beneficiaries of such cuts.

Moreover, such a cut does nothing to reduce any of the current inequities in Iowa’s tax code as they relate to working families with children, who are the most heavily taxed of all Iowans relative to their discretionary income. While a family of four making $40,000 owes no federal income tax, that family owes more than $1,200 in Iowa income taxes. At the same time, a retired couple with no children and $40,000 in Social Security and pension income owes no state income tax.

In fact, as noted by the official Fiscal Note on HF194, a reduction in income tax would mean a reduction for many school districts, which count on income surtaxes for portions of their budgets. This could force another tax shift to property taxes, because school districts fund their Physical Plant and Equipment and Instructional Support programs through a combination of property tax and local income surtax. Districts would be able to make up for lost income surtax with a greater share of those programs being funded through property tax. The surtax is used by 85 percent of Iowa’s 359 school districts.

Alternatives

Doubling the state Earned Income Tax Credit (from 7 percent to 14 percent of the federal EITC) would provide much greater benefit to 70,000 working low- and moderate-income families with children than the cuts in rates proposed in HF194 and would be a step to addressing a significant problem in Iowa’s income tax law. It would cost the state less than one-twentieth the cost of the tax cut in HF194. It also could be coupled with more appropriate tax treatment of select capital gains and other tax exemptions to high-income families and cover its cost. Such alternatives are much more appropriate ways to provide for tax fairness to hard-working Iowa families.

When the Iowa House debated the income tax rate bill, Republicans rejected a Democratic amendment that would have targeted tax cuts to middle-income families. Leaving aside concerns about equity and fairness, House File 194 is extremely costly: $330 million during fiscal year 2012 and $700 million per year after that. Even Branstad has warned that Iowa might not be able to afford that revenue loss while also cutting corporate income taxes and commercial property taxes. House Speaker Kraig Paulsen in effect admitted that his caucus moved quickly on the income tax cut because it was a simple bill to draft:

[Paulsen] thinks lawmakers have a heightened sensitivity to property tax relief, the 20 percent income tax cut is an easier bill to write than a property tax relief bill.

“We’ll get this out of the way and get the property tax relief going,” Paulsen said.

It amazes me that Paulsen can keep a straight face while dismissing concerns about hundreds of millions of dollars in lost revenue annually. What’s more disappointing is that four House Democrats joined 58 Republicans to pass House File 194 by a vote of 62-33. (Three Democrats and two Republicans were absent.) The roll call is on page 351 of this pdf file; Democrats supporting the bill were Dave Jacoby, Jim Lykam, Brian Quirk and Dennis Cohoon. Jacoby’s yes vote is bizarre in light of this statement he released on February 16:

“Republicans voted down a plan offered by House Democrats to keep 20,000 Iowa kids in preschool and provide more help for middle class families.  Instead, House Republicans have chosen an irresponsible $700 million plan that rewards the wealthy while leaving the middle class and our kids behind.”

Representative Jacoby, why did you vote for this “irresponsible” bill in the Ways and Means Committee and on the House floor?

So far, the Iowa Senate has been a firewall against the worst Republican tax and spending ideas. Democrats hold a 26-24 majority in the upper chamber and have vowed to preserve education funding at a higher level. On February 16, the Iowa Senate voted 26 to 24 along party lines to allow a 2 percent increase in state aid for K-12 education next year. While preschool funding hasn’t yet come to a vote in the Senate, Majority Leader Mike Gronstal has said the votes are there to keep this program going. Democratic senators panned Branstad’s preschool plan this week. Side note: first-term Republican Senator Mark Chelgren caused a little media frenzy by comparing Iowa’s current program to indoctrination policies of totalitarian regimes. Not ready for prime time, and not smart when you only won your election by a 12-vote margin.

Also this week, the Senate Appropriations Committee unanimously approved its version of the deappropriations bill, House File 45, but without language cutting funds in several areas, such as passenger rail and the state DNR’s Resource Enhancement and Protection program.

Branstad’s 50 percent corporate tax cut and the 20 percent individual income tax cut foreseen in House File 194 both appear to be non-starters in the Senate. Democrats plan to vote on their own tax reform bill soon. Senate Ways and Means Committee Chairman Joe Bolkcom describes the highlights here: $148 million in tax cuts targeted to 240,000 working Iowans in families making less than $45,000 per year. Another part of the package will cut taxes for businesses that invest in equipment, buildings and property that create jobs in Iowa.

State Senator Matt McCoy advocates saving $24 million in education budgets by consolidating superintendents. It’s an interesting idea, but I don’t see how a limit of one superintendent per Iowa county would be practical in the state’s larger urban areas.

Share any thoughts about state budget, tax or education policies in this thread.

P.S. I’ll give Iowa House Republicans credit for one thing this week. An Appropriations subcommittee approved a bill that would force the Board of Regents to sell the University of Iowa’s Jackson Pollock masterpiece “Mural” (worth at least $120 million). I don’t support the bill for various reasons, but a subcommittee hearing on the proposal finally prompted the Des Moines Register’s Kathie Obradovich to notice that Republicans are pushing a misleading storyline on the state budget:

Iowa has a budget surplus.  The House is expected to vote this afternoon on a 20 percent income-tax cut. House Republicans’ proposed budget sets aside over $300 million for tax cuts. And yet lawmakers are acting like the state needs a going-out-of-business sale. We should be bragging about our strong financial condition and the growing economy as a way to attract new residents, not acting like we need to hock our big-screen TV to pay the electric bill.

Better late than never.