February 2010

A Good Idea from Our Neighbors to the North

By John Hendrickson

The economic recession has not only hit the federal government, but also many state governments are facing serious budget problems as the New Year begins. The state of Iowa “will face the largest budget gap in its history: more than $1 billion…”[1] This massive budget shortfall problem is a result of Governor Chet Culver and state Legislators “who increased spending by nearly $1 billion in just two years.”[2] In order to resolve the budget crisis Legislators must reduce spending, lower taxes to stimulate Iowa’s economy, and adopt a spending limitation amendment or TABOR (Taxpayer Bill of Rights).

Iowa’s fiscal and economic outlook, just as with the nation, has suffered from too much government spending and intervention. In fact “Iowa’s total government debt has grown by almost $3 billion in the past five years and is expected to take another jump in the current fiscal year, partly because of Governor Chet Culver’s $830 million I-Jobs program.”[3] The total state and local government debt is estimated to be at $11.6 billion.[4]

The current polices of the federal government may not add any optimism to Iowa’s or any state’s fiscal outlook. The Medicaid expansion that is underway in the health-care reform legislation threatens to place enormous fiscal pressure on states that are already struggling with budgetary problems, and the economic reform programs that are targeted at bringing the nation out of a recession are not working. This in turn has resulted in the federal government having to deal with a major fiscal crisis. The ten percent unemployment and the slow job creation will create further pressures on state and local governments as more people demand services and relief.

Legislators should consider eliminating programs such as the Department of Economic Development, Iowa Values Fund, and the Iowa Power Fund, as recommended by Ed Failor, Jr, President of Iowans for Tax Relief.[5] Failor also recommended that both personal and corporate income taxes be reduced to spur economic growth and job creation.[6] Any tax increases, whether at the state or federal level during a recession, would further cripple the economy and business confidence.

Iowa should consider a constitutional amendment to limit both state spending and tax increases. In Minnesota, in order to bring fiscal discipline and sound economic policy, Governor Tim Pawlenty has proposed a constitutional amendment “to limit state government spending, ensure balanced budgets, and force lawmakers to prioritize limited resources…”[7] The Spending Accountability Amendment “would cap the state general fund budget at the level of revenue actually received during the previous budget period.”[8]

The Spending Accountability Amendment is similar to a TABOR amendment. TABOR amendments have been at the forefront of state fiscal policy ever since Colorado became the first state to adopt such an amendment. A TABOR amendment would require voter approval for all tax and spending increases and it provides the voters with additional power to hold Legislators accountable.

Opponents of TABOR argue that it will deprive funding for many essential state programs, but TABOR favors economic liberty and free enterprise rather than excessive government programs which seldom stay within cost, or achieve their intended purpose. In addition, in order to be economically successful and to encourage business to grow and to relocate to Iowa, our state taxes need to be kept low.

It is unlikely that Governor Chet Culver and the Democrat-controlled Legislature will consider a Spending Accountability or a TABOR amendment, but the idea behind these proposals would result in fiscal discipline and prudence. In confronting the budget crisis Legislators need to pass policies that encourage economic liberty and entrepreneurship, and those policies are rooted in tax and spending reforms.

John Hendrickson is a Research Analyst at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry.

[1] Jason Clayworth, “Iowa faces largest budget gap in state history,” Des Moines Register, <http://blogs.desmoinesregister.com/dmr/index.php/2009/11/25/iowa-faces-largest-budget-gap-in-state-history/> November 25, 2009, (January 8, 2010).

[2] Amy K. Frantz, Iowa’s State Budget: Spending Our Way to a Crisis Again, Policy Study, Public Interest Institute, March 2009, p. 3.

[3] Jason Clayworth, “Governments in Iowa now $11.6 trillion in debt,” Des Moines Register, <http://www.desmoinesregister.com> December 6, 2009 (January 8, 2010).

[4] Ibid.

[5] Ed Failor, Jr. “State budget saving measures,” Iowans for Tax Relief, <http:www.taxrelief.org> January 6, 2010, (January 8, 2010).

[6] Ibid.

[7] Office of Minnesota Governor Tim Pawlenty, “Governor Pawlenty proposes constitutional amendment limiting state spending,” <http://www.governor.state.mn.us/mediacenter/pressreleases/2009/PROD009714.html> November 5, 2009 (December 31, 2009).

[8] Ibid.