For the past four years, the state of Iowa has struggled with revenues that are growing, but have continued to fall short of projections. We are now seven months into the current fiscal year and there are early signs that revenues may actually come in above projections.
Some advocates have been trying to use sluggish revenue growth in Iowa as an argument for increasing taxes for various priorities. But a survey of three states that raised taxes last year shows that this approach is not an effective prescription for higher revenue.
South Dakota is one of the states that does not impose an income tax on their citizens. Instead, state revenue is primarily generated through sales tax. This was set at 4 percent until the 2017 legislative session, when the state raised the tax to 4.5 percent. Advocates and some legislators expected money to come rolling into to the state’s coffers. But that hasn’t happened.
In December, Gov. Dennis Daugaard announced that tax collections were actually coming in $33.7 million below what been projected when the state budget had been developed. As a result, Daugaard announced that salary increases for state employees would not be implemented.
Connecticut was the last state to adopt a budget for the fiscal year, not completing their work until the end of October. After several rounds of significant tax hikes in previous years, the Nutmeg State saw a steadily declining tax base. as individuals and businesses have chosen to leave the state. Instead of raising income taxes again, Connecticut legislators chose a different approach by raising the state’s cigarette tax by 45 cents, imposing a $10 per vehicle surcharge on car registration and instituting a 25 cent tax on Uber rides. Legislators believed that these revenue changes, along with a number of spending cuts (including a $130 million funding reduction for the University of Connecticut) would enable the state to have a balanced budget in Fiscal Year 2018.
Less than a month after adoption of the budget, state officials are already sounding alarm bells about facing another deficit. As the state’s 2018 legislative session began, members already knew that they were facing a $224 million deficit for FY 2018.
A habitual violator of good budgeting practices has been the state of Illinois. With billions of dollars of unpaid bills. and going two years without a state budget, legislators put together a FY 2018 budget plan that included a 32 percent increase in personal income tax rates. This plan was only implemented after the Legislature overrode Gov. Bruce Rauner’s veto. Legislators believed that they had created a spending framework that would enable the state to borrow up to $6 billion to significantly reduce the multi-year backlog of unpaid bills, while also balancing the budget. That hasn’t been the case.
Problems in the plan quickly emerged as state assets were sold at prices lower than what had been projected. Additionally, legislators had assumed that the creation of a third option for state employee pensions would generate significant savings for Illinois this fiscal year. But pension officials have now said that such a plan could not be implemented until next fiscal year, at the earliest. Now, Gov. Rauner is informing residents of the Land of Lincoln that their state is facing a budget deficit of at least $1.5 billion for this year, even after the dramatic rise in personal income tax rates.
We need to be smart about reforming our tax structure in a way that is pro-growth, and will still provide a stable revenue stream for our state government.
If you have any questions or concerns, please contact me.
Home phone: 515-382-2352