State Fiscal Forum: Assessing the Fiscal Environment in the Midwest and the Nation Federal Reserve B

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State Fiscal Forum Assessing the Fiscal
Environment in the Midwest and the NationFederal
Reserve Bank of Chicago and the National Tax
AssociationNovember 12, 2003

• By Randy Bauer
• Budget 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

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Rapid Change, Bigger Drop
Source Rockefeller Institute of Government,
SUNY
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Iowa No Revenue Rebound
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
Source Rockefeller Institute on Government, SUNY
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Iowas Price of Government is Falling
Source Iowa Department of Management
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States are Raising Taxes
Source NASBO, NCSL
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Deficits Structural or Cyclical?

• Magnitude of budget gaps suggests its 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? (SP)
• 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 Poors
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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
Source Iowa Department of Revenue
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Corporate Income Taxes Declining Share
Source Dr. Peter Fisher, University of Iowa
1975-2000 2001-2002 data from Tax Policy Center
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Midwest Sates Lose More because of Corporate
Sheltering
Source State Policy Reports, Multistate Tax
Commission
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Decline of Counter-cyclical Taxes
Source Iowa Department of Management
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Iowa Budget Cuts Reverse Course on Property Tax
Replacement
Source Iowa Department of Management
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1990s Expenditure Growth in Key Areas
Source Center for Budget and Policy Priorities
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States Put the Brakes on Budget Increases
Source NASBO
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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
Source NASBO
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Half of States Have Tax and/or Expenditure Limits
Source NCSL, 1999
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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 wont raise
  taxes campaign promises.
• Georgia, Illinois, Kansas, Maryland, Minnesota,
  Oklahoma

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