IOWA BUDGET CRISIS: TAX CUTS OR SPENDING?

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It looks like Governor Vilsack has surrendered and, much to the chagrin of Iowa liberals, will sign into law Republican spending cuts.

No doubt this will greatly distress the Des Moines Register editorial board. On Sunday, May 12, they put the blame for the current state budget crisis on, well, you can guess. And if you can’t here’s the link, and here’s the relevant passage:

I's [sic] not only the sluggish economy that's to blame for Iowa's persistent budget telegram data problems. Or the higher-than-expected state income-tax refunds. Or the rising bill for Medicaid. Or the unnecessary and inefficient areas of government in the state. It's something else, too: All those tax cuts Iowa made in the 1990s.

No, it isn’t. Some research done by my colleague Steve Garrison and I (most of the credit goes to Steve) reveals some interesting findings.

First, we found that the cuts in personal income and inheritance taxes did not harm state revenues. The cuts were enacted in 1998, and revenue from personal income and inheritance taxes only dipped in 1999. However, in the year 2000, revenues from those taxes saw their biggest increase in close to a decade, a whopping 9.11% in one year! Score one for supply-side economics. Furthermore, total revenues to the state government have grown an average of 4.3% since 1998. Thus, the current budget crisis is not due to tax cuts.

It is due to over-spending. This graph shows the rate of growth in Iowa’s population, inflation, and state spending from 1998-2001. A reasonable argument can be made that increases in government spending should be related to increases in population or inflation. Increases in population would, theoretically, increase demand for government services. Inflation raises prices, thereby increasing the cost of running government. The average growth in population and inflation in Iowa for 1998-2001 was 0.3% and 2.5%, respectively. The average growth in state spending, by contrast, was 6.1%. This means that government spending grew at more than twice the rate of inflation, and more than twenty times the rate of population growth!

Clearly, the Iowa state government spent too much the last few years. Thus, the appropriate remedy to the current crisis is spending cuts, not tax increases.