Iowa asks itself: How broke are we?

Five hundred million dollars.

That’s how far many experts believe the state’s budget will be in deficit for the 2009 fiscal year.

Legislators may not have a good picture of the state of the budget until mid-February.

With the national economy sputtering and indicators pointing to a tough budget year in Iowa, Gov. Chet Culver has already taken steps to ease the fiscal crunch, announcing Tuesday $70 million in cuts, including a hiring freeze, reducing purchases and making cuts to public universities.

Economists, however, point out that the cuts Culver has proposed constitute only 15 percent of the shortfall and that legislators will be faced with difficult decisions when they convene in January.

“I think what you’re looking at is round one, with the governor being proactive,” said Dave Swenson, an associate scientist in the department of economics at Iowa State University. “I also think that the [Culver] administration is considering additional options down the road, additional cut backs, additional restrictions or additional projects where they can hold off funding until things improve.”

The Iowa Revenue Estimating Conference meets today. Projections from the group will be used to help officials and lawmakers plan for the rest of the current fiscal year as well as the budget year that begins July 1. Unlike the national government, Iowa cannot run a deficit, which means that expenditures on services cannot exceed expected revenues.

“The first place to look for revenue to close the state’s budget shortfall, especially looking ahead to the next budget year, is the state’s tax code and its various tax expenditures and breaks,” said Peter Fisher, research director of the Iowa Policy Project and a co-author of a report released Wednesday providing suggestions to ease the budget crunch.

Fischer’s group, a non-partisan research organization based in Iowa City, suggests that instead of tax increases, Iowa can first find revenue by seriously examining tax loopholes and tax credits that have allowed Iowa’s revenues to wane. These ideas, as well as freezing some tax spending as the governor is doing with some state spending, could save as much as $165 million in normal economic times, the group contends.

Coupled with potential federal assistance through the coming economic recovery package, these moves would go a long way to balancing the budget without cutting essential public services, the report notes.

In May, Republican state Auditor David Vaudt made headlines when he called the governor’s proposed 2009 budget “a step backward in terms of transparency and fiscal responsibility,” predicting the state would be faced with a massive budget shortfall if it continued with its spending priorities.

Vaudt recently told The Des Moines Register that he thought it was unfortunate that the state hasn’t taken steps earlier to remedy the budget situation since “we had all the signals that there were going to be problems with the way they were balancing the budget, even absent the floods and the economic downturn.”

Swenson said all indicators for the state economy continued to look good through the summer and into the early fall. But now the rates of growth have slowed, forecasting a tough fiscal year.

In the end, he said, neither the Republicans’ dire predictions nor the Democrats’ hopeful outlook proved right: the state’s budget falls somewhere in between.

“At the end of last session, both legislative leadership and state Auditor Vaudt were worried that the government had made commitments to future spending that no one was talking about that were going to make the upcoming fiscal year somewhat more stressful,” he said. “The governor believed the revenue flow would be able to accommodate the new spending. Many others thought that was wishful thinking. Where they are now is sort of in between the two. We’re looking at cuts, but I don’t think it’s as dire as some folks will have you believe.”

Swenson said it’s too early to predict if budget gap will actually be $500 million. State government won’t have a clear picture of what sort of budget year they are facing until late February when the final Revenue Estimating Conference will meet.

“That’s when they’re going to get a sense of where they’re going to be for the next year,” Swenson said, adding: “Two months can make a big difference.”

Charles Bruner, executive director of the Child & Family Policy Center, which partnered with Iowa Policy Project on their report, urged legislators to make “a full head-to-toe examination of the Iowa budget situation.”

“This means all spending, including wasteful spending through the tax code, needs to be examined,” he said.

Bruner’s report offers several options, including a requirement that multistate corporations provide unified reporting, known as “combined reporting,” of their income for tax purposes to prevent their use of tax loopholes to avoid paying Iowa income taxes, which could yields as much as $80 million.

The group also suggests limiting the Iowa capital gains total exclusion to up to $100,000 and freezing the total phase-out of the social security tax exemption in order to restructure it to provide relief to low- and fixed income seniors without exempting those with higher incomes. Those two moves could yield $40 to $50 million in revenue, the report said.

Ideally, lawmakers should work to modernize Iowa’s tax system and enact broader individual income tax reform that would simultaneously address several of these tax provisions while restructuring Iowa’s income tax to be fairer and simpler, the report said.

Overall, Swenson said Iowa is in much better shape than a lot of other states. The budget is also in better shape now than it was the last time the state suffered through a recession in the early ’90s, he said.

“We got ourselves into trouble during the last recession for a couple of reasons,” he said.  “We cut tax rates and started engaging in giveaways to stay competitive economically. So the revenue flow going into the recession was double cut.”

This time around it appears government is being proactive and acting before “the numbers get awful.” But the road ahead is still going to be difficult.

“We don’t recover from a recession for years after we hit the bottom,” Swenson said. “Last time around in Iowa, we didn’t start to recover to our pre-recession levels until mid-2000. “