State Fiscal Forum:
Assessing the Fiscal Environment
in the Midwest and the Nation
Federal Reserve Bank of Chicago
and the National Tax Association
November 12, 2003
By Randy Bauer
Budget Director
State of Iowa
“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
Is There Something Different About the
Current Budget Cycle?
• More rapid change in
revenue performance
• Deeper descent
• Less bounce in the
revenue rebound
Rapid Change, Bigger Drop
State Tax Revenue Has Fallen Far More Sharply Relative to Economy
Than in 1980-82 and 1990-91 Recessions
6
4
% Change
2
0
-3.0
-4

-1.8
-3.5
Real GDP per capita, calendar y ear in which f iscal y ear began
Real state tax rev enue per capita, adjusted f or legislation
-6
-7.4
-8
1978
1980
1982
1984
1986
1988
1990
1992

-0.7

-2.0
-2
1994
1996
1998
2000
2002
State Fiscal Year
Sources: U.S. Bureau of Economic Analy sis, U.S. Bureau of the Census,
Significant Features of Fiscal Federalism Gov ernment
1984 (ACIR),
Fiscalof
Survey
of the States (NGA),
Rockef eller Institute of
Source: Rockefeller
Institute
Government,
SUNY
Iowa: No Revenue Rebound
Iowa General Fund Revenue Growth
17.0%
Red – Recession
15.0%
Green – Expansion
Dark Green – Expansion & Tax Increase
13.0%
Yellow – Expansion and Tax Cut
Percentage Change
11.0%
9.0%
Mean +5.6%
7.0%
5.0%
3.0%
1.0%
-3.0%
Source: Iowa Department of Management
Fiscal Year
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
19
76
-1.0%
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
State and Local Taxes:
Out of Sync With GDP
(Percent change)
14
12
10
8
6
4
2
0
1980
1983
Source: Global Insight, Inc.
1986
1989
1992
Nominal GDP
1995
1998
Tax Receipts
2001
2004
Eight Successive Quarters of
Negative Revenue Growth
State Tax Revenue Adjusted for Legislation and Inflation
Four-Quarter Moving Average, Indexed to 1994
125
1994=100
120
115
110
105
Source: Nicholas W. Jenny, Rockefeller Institute of Government, Underlying State Revenue Picture Remains Bleak, August
2003
Source: Rockefeller Institute on Government, SUNY
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
19
95
100
Iowa’s Price of Government is Falling
FY03 state taxes: 6.1% of income - lowest in 33 years
FY02 state and local taxes: 10.5% - lowest in 17 years
13.0%
Iowa tax price of
government: taxes,
licenses & permits
as % of personal
income
State taxes and
fees only
12.0%
11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
Local taxes and
fees only
4.0%
3.0%
2.0%
1.0%
0.0%
FY02
FY00
FY98
FY96
FY94
FY92
FY90
FY88
FY86
FY84
FY82
FY80
FY78
FY76
FY74
FY72
Source: Iowa Department of Management
States are Raising Taxes
Enacted State Revenue Changes
20
Billions of Dollars
15
10
5
0
1989
1990
1991
1992
1993
1994
1995
1996
1997
-5
-10
Fiscal Year
Source: NASBO, NCSL
1998
1999
2000
2001
2002
2003
2004
Deficits – Structural or Cyclical?
• Magnitude of budget gaps
suggests it’s 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
--
A Remarkable Change
• 2000: “How long can the
good times roll?” (S&P)
• 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)
Midwest Slow to Recover?
Source: Standard and Poor’s
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
Personal Income Outpacing
Sales Tax Collections
Source: Iowa Department of Revenue
Fiscal Year
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
$27
$26
$25
$24
$23
$22
$21
$20
$19
1977
Sales Tax Dollars Per
$1,000 Personal Income
Iowa Sales Tax per $1,000 Personal Income
Corporate Income Taxes’ Declining Share
Corporate Income Tax Share of All State Taxes
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1975
1980
1985
1990
1995
2000
Fiscal Year
Source: Dr. Peter Fisher, University of Iowa 1975-2000; 2001-2002 data from Tax Policy Center
$800
80%
$700
70%
$600
60%
$500
50%
$400
40%
$300
30%
National Average: -29.3%
$200
20%
$100
10%
$0
0%
IA
MO
WI
MI
MN
Source: State Policy Reports, Multistate Tax Commission
IN
OH
IL
Loss as a Percent of Revenue
Millions of Dollars
Estimated Loss of State Corporate Income Tax
Attributable to Tax Sheltering, FY 2001
Decline of Counter-cyclical Taxes
Iowa Real Inheritance and Cigarette Tax Collections
(in millions)
$100
$90
Inheritance Tax
Tax Collections
$80
Cigarette Tax
$70
$60
$50
$40
$30
$20
1993
1994
1995
1996
1997
1998
1999
Fiscal Year
Source: Iowa Department of Management
2000
2001
2002
2003
2004
2005
Iowa Budget Cuts Reverse Course
on Property Tax Replacement
$300
7%
$250
6%
5%
$200
4%
$150
3%
$100
2%
$50
1%
$0
0%
1996
1997
1998
1999
2000
Fiscal Year
Source: Iowa Department of Management
2001
2002
2003
2004
Percent of General Fund
Amount in Millions
Additional Replacement of Property Taxes
with General Fund Revenues
1990s Expenditure Growth in Key Areas
Nine of Ten New State Dollars Went to
Education, Health, and Corrections
Corrections
12%
All Other
8%
Medicaid
32%
Source: Center for Budget and Policy Priorities
K-12 Education
41%
Higher Education
7%
States Put the Brakes on Budget Increases
Percent Nominal Budget Change
10.0%
8.0%
ALL STATES
6.0%
Percent Change
4.0%
IOWA
2.0%
0.0%
1996
1997
1998
1999
2000
-2.0%
-4.0%
-6.0%
-8.0%
Fiscal Year
Source: NASBO
2001
2002
2003
2004
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
States Built, Rapidly Depleted Reserves
12%
Balance Percent of Expenditures
10%
8%
6%
4%
2%
0%
1989
1990
Source: NASBO
1991
1992
1993
1994
1995 1996 1997
Fiscal Year
1998
1999
2000
2001
2002
2003
Half of States Have Tax
and/or Expenditure Limits
Source: NCSL, 1999
A Problem with TELs –
Required State Costs Can Outstrip CPI
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
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 won’t raise taxes’
…campaign promises.
• Georgia, Illinois, Kansas, Maryland, Minnesota,
…Oklahoma