Analysts say budget plan could do more harm than good

Lawmakers say the state is facing a difficult budget year and a global recession, forcing them to make difficult cuts to every department in order to balance the state’s finances. But observers say their reliance solely on cuts and the refusal to discuss any tax increases or revenue enhancements will actually make matters worse.

Last week, Des Moines Public Schools announced that budget shortfalls would result in 300 layoffs, mostly in art, music, physical education and other teaching positions. In Iowa City, school officials are looking at a 14-percent property tax increase to avoid similar cuts.

Creative Commons photo by jimmywayne via Flick

State legislative leaders want to cut $173 million, or more than 10 percent, from the Department of Human Services budget next fiscal year, a move that would result in more than 500 layoffs of mostly front line workers. According to a memo from the agency’s leader to lawmakers, the ramifications include an estimated 151 potential abuse victims will remain at risk longer because protective workers will be unable to respond as rapidly and nearly 200 additional children will wait longer than one year to be adopted because staff cannot perform the necessary work to place the child in an adoptive family or complete the paperwork necessary for the court to complete the adoption.

The cuts will adversely effect the state’s most vulnerable, said Victor Elias, senior policy analyst with the Iowa Child & Family Policy Center, and will force more people into the state’s social safety net.

“The people being laid off, these are people who are losing their income,” Elias said. “They will qualify for food stamps. Their children will qualify for Hawk-i. They will have trouble paying their mortgage or providing for their family.”

The teachers, DHS workers and others impacted by the budget cuts will no longer be able to buy goods and services in their communities, Elisas said.

“Ultimately, it will deepen and lengthen the recession,” he said.

Lawmakers are looking at the bottom line and seeing huge savings by making draconian cuts, said Peter Fisher, research director for Iowa Policy Project. But the savings would be much smaller because the people losing their jobs will end up needing services from the very programs that are being cut.

“We’re not as badly hurt by the recession as a lot of states,” Fisher said. “But, the approach that they are taking is not going to help. I think it’s going to take longer for the state to get back on track.”

Balanced approach

Iowa came into the 2010 legislative session with a projected budget gap of $1 billion. But the Hawkeye State is not alone in it woes. Michele Mariani Vaughn, research manager Pew Center on the States, said 23 states issued across-the-board cuts, just like Iowa, in order to close mid-year budget holes. As focus turns to FY2011, many policymakers across the nation want to avoid tax increases and balance their budgets exclusively with cuts.

“It is extremely difficult to close budget gaps of the magnitude that states are facing with cuts alone,” Vaughn said. “Cuts alone just can’t do it. Tax increases alone can’t do it. Especially with the duration of this budget crisis, I think there isn’t one magic bullet that they can use to get through this year.”

Most experts believe even after the national economy begins to improve, state revenues will continue to be sluggish for several years, Vaughn said. Typically, states come out of recessions and can expect 4 or 5 percent annual growth, but this time 2 or 3 percent is more likely.

“This presents a pretty difficult picture for a number of years, so states really need to take a balanced approach to avoid huge tax increases and cuts that are simply unpalatable,” she said.

Iowa’s legislative leaders, however, have made it clear that tax increases are off the table. And while Gov. Chet Culver’s proposed budget included eliminating more than $52 million in state business tax credits, Elias said it doesn’t appear as though lawmakers are interested in going down that route.

“There is little evidence that the legislature is going to do that,” he said. “But to put it in perspective, that $52 million could pay for about 1,000 teachers, including salary and benefits. Where is our sense of priorities?”

State Rep. Bob Kressig, D-Cedar Falls, summed up the state’s budget responsibilities as “we educate, we incarcerate, we medicate,” adding that beyond that there is little money left. Senate Majority Leader Mike Gronstal, D-Council Bluffs, said the $175 million expected to be cut from the state’s education budget means local districts will “need to tighten their belts, too. They need to do the same thing as we’re doing — making real cuts as we’ve done and dipping into their reserve as we’ve done.”

Elias is not impressed. He said if lawmakers truly want to pass a responsible budget that won’t cause long-term harm, they need to cut the $52 million the governor identified in the tax credit program, as well as close loopholes in the tax system that allow $80 million and $100 million to leave Iowa every year because corporations shift their taxable profits to other states. In addition, he points to recent polls, both by the Iowa Policy Project and The Des Moines Register, showing the public believes tax increases should be on the table to avoid deep and damaging service cuts.

“They need get to responsible on both sides of the budget,” he said. “I’m not saying you can solve all our problems by just looking at revenues, just as you can’t solve it by just looking at cuts. You need a balanced approach. They’ve already done cuts. They haven’t done anything in terms of looking at revenue.”

Taxes vs. cuts

A 2001 analysis conducted by Peter Orszag and Joseph Stiglitz of the Center for Budget Priorities determined that tax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run. Reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are likely to be more damaging to the economy in the short run.

David Swenson, an economist at Iowa State University, told The Iowa Independent previously that the state should seriously look at a 10-percent across-the-board tax cut passed in the late 1990s if lawmakers are truly serious about making sure everything is on the table to close the state’s budget gap.

“Those tax cuts really locked us in to one heck of a tough couple of years of budget stress during the Vilsack administration,” Swenson said. “I think that state government should rethink those cuts and shift that individual income tax rate back upward.”

Not everyone is sold on the idea that tax increases are best for solving budget problems, Vaughn said, but increasing revenues must be an option during a recession the size of which states are currently facing.

“Policymakers are in a very difficult position,” she said. “These are certainly not easy decisions to make, and there is no doubt they will have to revisit them down the road.”

Fisher said Iowans would not be pleased with legislators if “we’re laying off teachers and case workers to preserve a tax credit for a business.”