Mike Lipsman has good and bad news for Iowa policymakers, including Gov. Kim Reynolds.

Lipsman, a former numbers cruncher for the Iowa Revenue Department who now analyzes financial trends for private clients, has studied the available data for the state government fiscal year that ended June 30, and he’s come to some conclusions.

One is that after years of small growth and skimpy budget increases, net income for Iowa’s general fund increased a healthy 6.8% last year to $8.24 billion.

That’s significantly higher than the 4.7% increase state officials predicted last March.

But Lipsman sees problems going forward.  

For starters, much of the last year’s $524 million increase is not sustainable because it came from one-time gains tied to the 2017 federal tax cuts.

Also, there are growing signs of new problems at a time when Iowa’s farm economy is already stalled. 
Officials have known for some time that the 2017 federal tax cuts would provide a temporary boost to state government, because the cuts left more cash in Iowans’ pockets for the state to tax. To offset those gains, lawmakers lowered Iowa’s tax rates in January to return state tax collections to roughly the level they were before the federal cuts.

The delay in resetting Iowa’s rates provided state government with a one-year windfall.

Until now, no one knew how large the windfall was. But using new data, Lipsman estimates it accounted for as much as two-thirds of last year’s $524 million increase.

If that’s true, state revenue collections for the new fiscal year that began July 1 should be lower by hundreds of millions of dollars. In fact, total tax collections for the current year may not reach the $8.24 billion collected in the year just ended.

That would not be as bad as it sounds, because last year’s collections included a lot of money that the state was not expecting and that it will presumably put in a rainy day fund.

That would be a good move because Lipsman sees problems in three key sectors: retail, corporate profits and bank profits.

Retail is of particular concern because, after individual income taxes ($4.09 billion), sales taxes ($2.34 billion) are state government’s next biggest revenue generator. 
Sales tax collections grew an anemic 0.24% last year, Lipsman noted, because of “growing e-commerce sales, the large number of closings of traditional retailers, and the decline of farm income.” 

That should improve somewhat this year, because more e-commerce sales are now subject to Iowa taxes.

But e-commerce is unlikely to generate significant gains, if for no other reason than increased online sales come at the expense of local merchants, many of whom have already closed their doors.

Nor is the outlook rosy for corporate tax collections, which produced a record $545 million of net income for the state last year.

Lipsman noted that Iowa’s corporate income tax collections, like individual income tax collections, benefited from the federal tax cuts.

He added: “Since the federal law change has passed the one-year mark and since corporate profits are starting to decline, it is likely corporate income tax receipts will experience little growth and possibly a decline during FY 2020.”

The same is true for Iowa banks, which saw a 43% increase in net tax payments to the state last year, topping the 27% increase in corporate tax receipts.

Finally, Lipsman said it is important to remember that most federal tax cuts for individuals disappear after 2025, unless extended, which will be difficult because of rapidly growing federal deficits.

Once the federal cuts end, he added, the river of tax money that flowed into Iowa last year will reverse and become a drain on state tax collections.