Culver defends budget-balancing act

In officially rolling out his 2010 budget proposal, Gov. Chet Culver made it clear that state government simply has to do more with less. Programs must be reduced and spending must be cut, he said.

During a Wednesday morning press conference that sometimes turned testy,  Culver once again voiced opposition to any tax increases, saying he thinks they will do more harm than good during a recession.

“I don’t know how much more clear I could be,” Culver told reporters. “I do not believe raising the gas tax during a recession is a prudent thing to do.”

Gov. Chet Culver

Halfway through the 2009 fiscal year, Culver called for a 1.5-percent across-the-board cut to the state’s budget, meaning its full-year value in 2010 is 3 percent. For 2010, Culver is calling for 6.5-percent cuts in nearly every state program and is asking legislators to use $200 million from the state’s cash reserves during the 2010 budget year. Culver said this cut was the largest the state has seen in decades, possibly ever.

In a letter to legislators at the start of the 2009 General Assembly, analysts David Osterberg and Charles Bruner of the Iowa Fiscal Partnership, a collaboration between the Child & Family Policy Center and the Iowa Policy Project, said cutting government spending and laying off employees will have a serious negative impact on economic recovery.

“In short, across-the-board cuts in state appropriations will have a significant adverse impact on Iowa’s economy, producing negative effects that are likely many times more severe than the consequences of any tax changes affecting higher income Iowans and multistate corporations,” they said in their letter to legislators.

Culver’s call to avoid any tax increase means he is engaging in a delicate balancing act – trying to cut his way to a balanced budget without hurting the economy even more, said David Swenson, an associate scientist in the Department of Economics at Iowa State University.

“An effective, efficient and fully-functioning state government is important to the economy,” Swenson said.  “If you have all the goods and services you want your state government to provide that are being done efficiently and effectively and are reaching the people they should be reaching, that’s good for your economy.”

Swenson praised the governor’s actions in dealing with the economic circumstances but said the difficulty is when cuts start to affect “human capital development,” like community college and K-12 funding. That’s when long-term adverse effects arise.

“It’s a balancing act,” he said. “And it’s not easy.”

Culver’s cuts do exclude some programs, like services to the unemployed, disaster relief and pre-school education, but the vast majority of programs will be effected.

The governor acknowledged his proposed cuts will result in layoffs.

“Significant layoffs are very likely any time you cut $580 million out of a budget,” he said.

Raising income taxes on the wealthy, an idea some believe should be considered instead of some of the governor’s cuts, most likely would not have any real positive effect on the state budget right now, Swenson said.

“It’s not evident to me that that’s a solution,” he said. “Iowa’s tax code is already very progressive.”

But certain tax credits, such as the Grow Iowa Values Fund, should get another look from legislators searching for money, he said.

“Tax credits accumulated over the years that many businesses are able to take advantage of that would have located in the state nonetheless,” Swenson said. “Firms like Wells Fargo or Wellmark or Pioneer or Monsanto are receiving these credits but they are not stimulating new employment. They would have located here without the credits.”

The Values Fund makes grants and gives tax credits to businesses seeking to relocate and expand in the state. The money, which totals $50 million a year, goes to recruitment and retention, but also to things such as job training and research at Iowa’s regent schools.

Critics call the program corporate welfare and say that companies make location decisions based on infrastructure needs, available workforce, skill level of the workforce and amenities, not small tax credits.

Bruner and Osterberg argue that tax credits have grown much faster than general fund expenditures as a whole. They need to be re-examined to gauge their effectiveness.

“Whether you’re a supporter of these tax credits or not, everything is on the table right now,” Swenson said. “It’s pretty hard to argue that tax policy in Iowa is driving business out. Business will argue it, but I have trouble finding evidence that’s the case.”

Culver’s budget proposal does eliminate about $30 million in tax credits. Some feel he could go further.

The national recession and the economic downturn in Iowa are far from over, Swenson said. He predicts that even when economic indicators begin turning up again, the rate of unemployment will still remain high, creating a “jobless recovery.” It could also mean more cuts down the road.

“I think that explains the steps the governor and his people are taking,” Swenson said. “I think fiscally these are good moves. The governor has a responsibility to balance the budget. Rather than pretend like they can gut it out, they are doing what they can and being very responsible.”