December 13, 2023 REC Summary

The Revenue Estimating Conference (“REC”) comprised of a three-member panel (Kraig Paulsen, David Underwood, and Jennifer Acton) met Wednesday (12.13.23) as part of their standard schedule of meetings to estimate future state revenues. A summary of the information discussed during the meeting is below, along with the linked spreadsheet distributed following the meeting that contains more detailed revenue information. Notably, at the end of the meeting, Mr. Underwood announced his retirement from the REC after more than two decades of service on the REC. 

Important to Note: 

The REC’s number for fiscal year 2024 is slightly lower than the October estimate by $6.3 million (0.06%). Recall, Governor Reynolds uses the December estimate to prepare her budget and the Legislature is required to use the lower of the December or March estimates for its fiscal year (“FY”) 2025 budgeting.   

Summary:

FY23 revenues concluded the year higher than expected by $94.9 million (0.97%) and grew by over $41.9 million as compared to FY22 actual revenues, which equates to 0.4% growth. Importantly, Wednesday’s REC estimate also accounts for current and future impact of the recent tax reform, which will reduce state revenues in future years due to lower tax rates - estimated to result in $98.8 million fewer dollars in FY24 as compared to FY23 (equating to a 0.1% decrease in revenue growth for FY24). The REC estimated further decrease for FY25 ($109.4 million or 1.1%). However, the REC stated that Iowa continues to be in a solid fiscal position with full budget reserve funds.  

General Comments From the REC Regarding Factors Impacting Estimates: 

• It appears the impending recession as many predicted may not be as threatening as once thought. 
• The Federal Reserve has been trying to execute a soft landing for the economy and they may have succeeded.  
• Nationally, inflation has dropped from as high as 9% last year. The feds have continued to hold interest rates steady at the current target range of 5.25% to 5.5%. These analytics anticipates the feds will slowly begin to lower interest rates next summer. If correct, this should inject energy into the national economy. 
• Although the labor market continues to be strong, it is starting to show signs of slowing. Businesses are reluctant to let workers go due to the difficulty in finding and retaining employees in today's job market.  
• The Bureau of Labor statistics reported wage growth for November at 3.96%, which is the lowest wage growth since June of 2021 and down 4.99% from a year ago. 
• The most recent federal data report for November showed that the U.S. economy added 199,000 jobs and has added 186,000 jobs on average over the last six months. 
• The national unemployment rate is currently at 3.7%, and the U.S. labor force participation rate is 62.8%. 
• In Iowa non-farm employment peaked in April 2023 at 1.6 million jobs. 
• Through October 2023, the six-month average unemployment numbers in Iowa are down 11,500 jobs from April’s peak. 
• Iowa’s current unemployment rate is at 3.2%, up from 2.9% in September as the state has more jobs than workers in this aging workforce. 
• Iowa is currently experiencing drought conditions in approximately 84% of the state. Despite the drought conditions, yields for both corn and soybeans appeared to have exceeded expectations. However, crop prices have declined.  
• Major tax reductions began in January 2023 and continued to slow the accumulation of general fund revenue. Yes, Iowa continues to see modest growth in revenue coming into the state and the revenue numbers support this.  
• A further tax decrease will occur on January 1, 2024, reducing the individual income tax rate increase 6% to 5.7%; the inheritance tax will be reduced from 4% to 2%; and the corporate income tax rate will be lowered from 8.4% to 7.1%. In addition, the franchise tax would be reduced from 4.7% to 4.4%.  
• Even with the reduction of corporate tax rates, through November, corporate tax receipts are up 15%. While this number is anticipated to drop, it should still be well above the $700 million dollar number necessary to trigger the next rate reduction. 
• Iowa continues to see healthy growth in sales and use tax. Through November, sales and use tax were up 9%.  
• Iowa continues to be in a solid fiscal position with full budget reserve funds. 

FY24 Revenue Estimate Revised Slightly DOWN from October 2023 Estimate:  

As a reminder, FY24 began July 1, 2023. The REC slightly decreased its FY24 estimate from the October REC meeting by $6.3 million (0.06%). This increase equates to projected Net Receipts Plus Transfers of $9,746.5 million for the year, which reflects a 0.1% decrease in revenues as compared to FY23 (largely related to tax policy changes during the 2022 and 2023 sessions). 

FY25 Revenue Estimate Revised UP From October 2023 Estimate:  

As a reminder, FY25 begins on July 1, 2024, and ends June 30, 2025. The REC increased its December FY24 estimate, as measured against the October estimated revenues, by $60.8 million (0.64%). Consequently, the revised estimate means total estimated revenues for FY25 are $9,687.6, an overall decrease of $109.4 million from the estimated FY24 numbers, or a reduction of 1.1%.