This week, the Iowa Fiscal Partnership (IFP) released a study examining Iowa's budget woes with an eye toward understanding how the state's fiscal situation will be impacted by Iowa's growing senior population. Not only are Iowa lawmakers currently grappling with a budget shortfall, this report predicts that more tough decisions are coming. One of the reasons that even harder times may be on the horizon is that Iowa, like many states, offers elderly preferences that are going to become more costly as America grays.
In fact, IFP found, "The aging of the population will probably produce a decline in state income tax revenue of 2 to 3 percent in Iowa, due largely to the adoption of tax preferences for seniors. If there were no elderly preferences in Iowa's income-tax code, the very small projected increases in total population combined with the aging of the population would increase income-tax revenues for a period of time, reaching a peak in 2015 at $2.27 billion."
The report offers helpful insight into why revenues aren't able to keep up with growing needs (beyond elderly preferences). Most notable is the sales tax base erosion taking place both because the state's tax base is made up of mostly goods and not services, and because of the continuing need to close the sales tax loophole which ensures that online purchases aren't subject to the sales tax. Resolving the problem of sales tax base erosion and poorly targeted elderly preferences is something many states could tackle now in their attempt to deal with their own budget mess. ITEP has written a variety of policy briefs on topics discussed here: elderly preferences in the tax code, sales tax base expansion, and taxing internet sales.
The Virginia based Commonwealth Institute recently issued their own set of recommendations offering suggestions on ways that the Old Dominion state could dig itself out of its budget crisis. These recommendations are good ideas any time, but will likely receive more attention now because of the state's budget crisis. Their recommendations include further means-testing of elderly tax preferences, and closing corporate loopholes through steps such as enacting combined reporting. The Institute takes a balanced approach and acknowledges that some cuts may need to be made and the state's rainy day fund may need to be tapped to deal with the state's shortfall. This balanced and comprehensive approach including both revenue enhancers and tax cuts may be the best solution for many states in crisis.