1. State Fiscal Forum: Assessing the Fiscal Environment in the Midwest and the Nation Federal Reserve Bank of Chicago and the National Tax Association November 12, 2003 By Randy Bauer Budget Director State of Iowa

2. “Before you go any further, let me reiterate that I, for one, see nothing wrong with killing the messenger.” Source: Business Law Today, March/April 1998

3. Is There Something Different About the Current Budget Cycle? More rapid change in revenue performance Deeper descent Less bounce in the revenue rebound

4. Rapid Change, Bigger Drop Source: Rockefeller Institute of Government, SUNY

5. Iowa: No Revenue Rebound Red – Recession Green – Expansion Dark Green – Expansion & Tax Increase Yellow – Expansion and Tax Cut Mean +5.6% Source: Iowa Department of Management

6. Is Revenue Sufficient to Meet Program Needs? Not according to previous history Eight successive quarters of no growth (adjusted for tax changes) States are enacting tax increases, but Iowa has not

7. State and Local Taxes: Out of Sync With GDP (Percent change) Source: Global Insight, Inc.

8. Eight Successive Quarters of Negative Revenue Growth Source: Rockefeller Institute on Government, SUNY

9. Iowa’s Price of Government is Falling Source: Iowa Department of Management

10. States are Raising Taxes Source: NASBO, NCSL

11. Deficits – Structural or Cyclical? Magnitude of budget gaps suggests it’s structural Problems persist two years after end of recession ……….. Tax law changes reduce the size of the -- ---normal bounce back Demographics may be more of a factor

12. A Remarkable Change 2000: “How long can the good times roll?” (S&P) 2002: “State budgets are.under siege” (NASBO) “Nearly every state is in.fiscal crisis” (NCSL) –$71 billion FY 03 deficit –$78 billion FY 04 shortfall –$200 billion 4-year gap (Source: NCSL State Budget and Tax Actions 2003)

13. Midwest Slow to Recover? Source: Standard and Poor’s

14. How to Protect Revenues and Programs from Volatility? Devise tax structures with more reliability, predictability, and sufficiency –Sales tax in an e-commerce and services economy –Corporate income tax: a ‘voluntary’ tax? –Squeezing counter-cyclical taxes Nothing safe in budget firestorms – need reserves as insurance

15. Personal Income Outpacing Sales Tax Collections Source: Iowa Department of Revenue

16. Corporate Income Taxes’ Declining Share Source: Dr. Peter Fisher, University of Iowa 1975-2000; 2001-2002 data from Tax Policy Center

17. Midwest Sates Lose More because of Corporate Sheltering Source: State Policy Reports, Multistate Tax Commission

18. Decline of Counter-cyclical Taxes Source: Iowa Department of Management

19. Iowa Budget Cuts Reverse Course on Property Tax Replacement Source: Iowa Department of Management

20. 1990s Expenditure Growth in Key Areas Source: Center for Budget and Policy Priorities

21. States Put the Brakes on Budget Increases Source: NASBO

22. Do the States Have the Tools to Manage their Budgets? State credit ratings would suggest they do Generally greater financial attention than 20 years ago Tax/expenditure limits can lessen flexibility The issue may have more to do with politics … than budgets

23. States Built, Rapidly Depleted Reserves Source: NASBO

24. Source: NCSL, 1999 Half of States Have Tax and/or Expenditure Limits

25. A Problem with TELs – Required State Costs Can Outstrip CPI

26. Several Factors Motivating Use of Debt 9.7% of state and local revenue in 2002 –Borrowed $127 billion more than repaid –3 ½ times the level of 1999 Borrowed $224 billion during FY 2003 “Perfect Storm” - Historic low interest rates - Historic late-FY shortfalls - Election year distaste for tax …increases - Keynesian approach to the recession

27. Political Will: Revenue Accelerations Six states utilizing revenue accelerations in their FY 2004 budget? Georgia, Illinois, Kansas, Maryland, Minnesota, Oklahoma.Six states with new Governors, party affiliation …switched hands, and ‘I won’t raise taxes’ …campaign promises. Georgia, Illinois, Kansas, Maryland, Minnesota, …Oklahoma