Budgeting for the bathtub

April 2023

Iowa lawmakers put the squeeze on schools, health, clean water and child care to reserve about $1 of every $5 in revenue for tax cuts for the rich

As the Iowa Legislature lurches toward adjournment, its leaders are following a playbook laid out years ago by anti-tax activist Grover Norquist, quoted often for his dream to reduce government to the size where he could “drown it in the bathtub.”[1]

In 1992, Iowa adopted a spending limitation: lawmakers could budget no more than 99 percent of available revenues. The rule was intended to help ensure a balanced budget and build reserves for cash flow and emergencies.[2]

But in recent years, lawmakers have turned the rule’s goals — responsible budgeting and planning for the future — upside down.

By holding down investments or making outright cuts in education, public safety, child care and environmental protection — services that expand opportunity for Iowans today and far into the future — lawmakers have deliberately directed hundreds of millions of dollars to the so-called “Taxpayer Relief Fund” to be used for tax breaks that will disproportionately privilege the already privileged few.

To do so, they have been restricting funding by far more than the required 1 percent below revenue. This year, they have set a budget target of $8.5 billion, 18 percent below what is available to spend, even with the 99% limit in place.[3]

Put another way, Iowa is budgeting only about $4 of every $5 for services. The other dollar is being budgeted for tax cuts.

Even as the dollars are piling up for tax breaks, lawmakers are holding down funding for K-12 and higher ed, falling short on child care, ignoring water pollution and shrinking Medicaid and SNAP by erecting harsh administrative barriers. By setting the budget  far below revenues, they pit services against one another, claiming, for instance, that it’s programs like SNAP and Medicaid — and not spending on tax cuts — that "are putting pressure on us being able to fund other priorities," as House Speaker Pat Grassley told reporters in January.[4]

The gap between revenues and the budget is expected to grow. The Governor’s budget anticipates that with the addition of unspent dollars in the coming fiscal year, the Taxpayer Relief Fund, which was just over $1 billion in 2022, will reach over $3.4 billion by July 2024 — not including whatever additional tax-cut dollars are directed there by legislators next session.

The bathtub

About that Grover Norquist strategy. Senate File 552, alive at the Legislature, would set up the elimination of Iowa’s personal income tax.[5] The personal income tax generates about half of the General Fund. Imagine cutting half of all funding for schools, Medicaid, public safety or the judicial system. That’s getting government to the size where you could drown it in the bathtub, if you were so inclined.

Along with slashing our ability to provide needed services, such radical income-tax cuts exacerbate existing racial disparities resulting from long-standing discrimination in housing, education and employment. Because of the structure of our tax system, they favor Iowans at the top of the income distribution, disproportionately white, and disadvantage those at the bottom, disproportionately Iowans of color.

SF 552 would eliminate the personal income tax in two steps:

• First, accelerate income-tax rate reductions passed last year so that Iowa would move to a flat-rate income tax of 2.5 percent by tax year 2028.

• After 2029, use a pot of one-time money to effectively buy down Iowa’s remaining income-tax rates.

Whether or not they pass the bill this year, lawmakers are setting the stage for such a plan. The Taxpayer Relief Fund is only likely to grow, and grow quickly, because of current budgeting practices in the General Assembly.

When the state runs surpluses, it sets the money aside in reserve funds often called “rainy day funds” — a Cash Reserve Fund and an Economic Emergency Fund. But the size of these funds is capped, and, as noted by the Legislative Services Agency (the Legislature’s fiscal experts) in March, those reserve funds are projected to be at their maximum this year and next. Together, LSA estimates, they carry balances of $895.2 million for this year and $962.5 million for FY 2024.[6]

So, with nearly a billion dollars already set aside for emergency use, new surpluses — resulting from good revenues propped up by federal pandemic aid to governments and individuals and deliberately suppressed state budgets — keep piling up in the next surplus fund in the chain, the Taxpayer Relief Fund, a repository for surpluses to pay for tax cuts.

The LSA in its Fiscal Note on SF 552 projected that if there are no other appropriations or transfers from the Taxpayer Relief Fund, its balance will exceed $4 billion by the end of FY 2029, “and that level should be sufficient to reduce the State individual income tax rate to 0.00% beginning with (Tax Year) 2030.”[7]

Recap

Given this structure, the ratcheting down of public services is self-fulfilling. Consider the sequence: Hold down spending, feed the tax-cut fund, hold down spending some more, feed the tax-cut fund some more. Next, pass a law (SF 552 could be the one) directing that the Taxpayer Relief Fund be turned into a pot of one-time money to eliminate the income tax for good. Then the state General Fund revenue is slashed by half — and nothing is there to replace it. Pretty soon, something is drowning.