Explaining the taxpayer relief fund
By now, you have probably heard that the governor wants to reduce the income tax to 0. You have probably heard about the taxpayer relief fund. But what is happening may be a bit of a mystery. So let's dig into it.
By law, the governor and the legislature can budget only 99% of the general funds that are collected by state government. By law, the state government cannot go into debt in order to pay its bills. The state must have a balanced budget.
If the receipts coming into state government fall short, there are rainy day funds to fill in the gap. Think of this as money in a savings account that holds reserve funds. There are actually two reserve accounts -- one called the cash reserve fund which is used to support cash flow needs that occur day-in and day-out and the second one called the Iowa economic emergency fund to be used for emergencies, such as dealing with falling revenues. There is a third reserve fund called the taxpayer relief fund, which we will be discussing below.
For a number of years, the legislature and governor have been setting budgets that use less than 99% of the collected general fund revenues. The difference between what has been collected and what has been budgeted has been deposited in the taxpayer relief fund. The amount of money in this fund has been growing over the last ten years, to the point that the governor announced in September, 2023, that the balance was 2.74 billion dollars.
What this means is that the state is collecting revenues and not spending them on services, even though the public is asking for more money to be spent on things like improving water quality, nursing home inspections, public schools, and support for public colleges and universities. Instead this taxpayer relief fund grows year after year.
The state income tax is on a path to be reduced to a flat tax. Every year the tax rates will be ratcheted downward so that by tax year 2028, the individual income tax will be 2.5%. Corporate income tax rates are also being lowered.
There are calls from legislators to ratchet the income tax rates downward at a faster speed than is currently in the Iowa Code. A bill SF552 was introduced in the 2023 legislative session, and it is still active this year, that will do just that. In order to do it, the money in the taxpayer relief fund is going to be used to pay the state's expenses as the income rates are further decreased. Eventually the money in the taxpayer relief fund will be hitting zero.
We have been hearing calls by the governor saying that she wants to reduce the income tax to zero by the time her current term of office ends in 2026. That plan would ratchet down the income tax rates faster than what is contemplated in bill SF552. In fact, the governor stated during an interview on the Ruthless podcast, "you’ve got Republican governors that are trying to outdo each other, so that’s why I’ve got to come back and cut taxes again", according to an article by Patrick Gleason in Forbes on August 15, 2023.
Already the state revenues from income tax are starting to fall and they will continue to fall as the income tax rates continue to fall. The administration is gambling that the sales tax will grow as people spend more on taxable goods and less on income tax and that will offset the loss of income tax.
But what if they don't balance each other out? At some point, if the revenues do not support the budget needs of the state, the budget will be cut, along with the services the budget provides and the staff doing the work. Or some tax will have to be increased - perhaps the sales tax. Iowans are currently seeing needed services going under funded or not funded at all - things could get worse, much worse.
The governor is in the process of decimating state government and drowning it in a bathtub. It is happening right before our eyes.
References
For more information on Iowa tax policy, see Common Good Iowa, at www.commongoodiowa.org
David Reynolds, "Iowa's Expenditure Limitation Process", Legislative Services Agency, November 16, 2012
Chapter 8 of the Iowa Code, the Department of Management - Budget and Financial Control Act
"Gov. Reynolds Announces Iowa Budget Surplus of $1.83B", Office of the Governor Press Release, September 27, 2023
David Reynolds, "Iowa's Expenditure Limitation Process", Legislative Services Agency, November 16, 2012
Jennifer Acton, Fiscal Note for SF552, Legislative Services Agency, April 13, 2023
Tom Barton, "Reynolds hears advocacy groups' priorities in budget hearing", Cedar Rapids Gazette, January 4, 2024
Erin Murphy, "Iowa tax revenue to flatten next year", Cedar Rapids Gazette, December 14, 2023
Erin Murphy, "Iowa Republicans eye further income tax cuts as state revenues flatten", Cedar Rapids Gazette, December 31, 2023
Tom Barton, "Iowa Gov. Kim Reynolds wants to abolish state income tax by 2026", Cedar Rapids Gazette, February 10, 2023
Patrick Gleason, "Governor Kim Reynolds Wants To Make Iowa The Nation's Next No-Income-Tax-State", Forbes, August 15, 2023
