MONEY

Ag slowdown imperils state revenue

Donnelle Eller

deller@dmreg.com

Money coming into Iowa's government coffers was flat the first quarter of this fiscal year, raising concern about how big an effect the slowing farm economy could have on the state budget.

State revenues — income tax paid by workers and corporations, along with sales tax paid at malls, restaurants and bars, among other sources — hit $1.77 billion since the start of the fiscal year July 1. It's about even with revenue received this time last year.

But the state's $7.17 billion budget is built around getting 6 percent more revenue this fiscal year than last year.

Gov. Terry Branstad and state budget and legislative leaders say they're closely watching receipts but add that it is too soon to be alarmed.

"We're concerned about the weakness in the ag economy, but I don't think the sky is falling yet," said Senate Majority Leader Michael Gronstal, D-Council Bluffs.

The Iowa Revenue Estimating Conference, created to provide lawmakers guidance on state revenue, meets Tuesday at the state Capitol.

David Underwood, a conference committee member and retired Mason City businessman, said he's worried about agriculture's downturn and its impact on the economy. But, he added: "I'm not not sure three months is indicative of a full year."

U.S. prices for corn and soybeans have fallen about 50 percent since 2012, when drought conditions drove prices to new highs. Income to farmers has been squeezed by low commodity prices and stubbornly high production costs such as land, seed and fertilizer.

Farm income in Iowa last year fell about 38 percent to $5.2 billion from 2013, U.S. Department of Agriculture data show. If Iowa follows the projected cut in U.S. income this year, it would slice another 36 percent — or $1.9 billion — from farmers' incomes.

Iowa is the nation's leading corn grower, projected to harvest 2.4 billion bushels this year, and the No. 2 soybean producer, forecast to reap nearly 521 million bushels.

Mike Lipsman, an economist at Strategic Economics Group in West Des Moines, sees the first quarter's stagnant state receipts as an indicator that the ag downturn is rippling into other areas of the economy, particularly manufacturing.

Reduced hours for workers and job cuts at farm machinery plants such as Deere & Co. and Kinze Manufacturing drag down the income tax workers pay.

That trickles into companies that supply parts, equipment and services to larger manufacturers, cutting their profits — and corporate taxes paid to the state, said Lipsman, who formerly led the state's tax research department.

For example, corporate income taxes are 10 percent below their level at the same time last year.

Lipsman believes the state will need to trim its forecast for this fiscal year and next with continued weakness in the farm economy.

He points to a state index that's designed to help project the economy's direction. It has declined for eight straight months, signaling a future contraction.

A state official has said it will likely mean a slowdown in growth.

Ernie Goss, an economist at Creighton University, said it's not just a farm downturn that Midwestern states are struggling with. It's also weakness in energy, with falling prices for oil and gasoline trimming profits for ethanol and biodiesel production in Iowa, and reduced exports for manufactured goods, thanks to slowing economies in Japan, China and Europe.

A strong dollar also makes U.S. products less competitive overseas.

Farm-related manufacturing and strong export markets helped Iowa's economy during the recession, Goss said. "Our economic tailwind has now become an economic headwind," he said.

Weakness in manufacturing, particularly durable goods such as tractors and combines, likely will trickle into other sectors such as services, Goss said. Rural cities and towns would see it first, but cities could get hit as well.

David Swenson, an economist at Iowa State University, and Mike Owen, executive director of Iowa Policy Project, an Iowa City think tank, aren't convinced the farm weakness will have a significant impact on the broader Iowa economy.

Swenson agrees that Iowa's manufacturing industry has struggled. So far, manufacturing has failed to regain the losses that occurred during the recession.

But total state job gains have continued to grow, steadily marching upward since 2010.

"The overall economy continues to be on an expansive path," Swenson said.

In August, Iowa had 26,100 more jobs than a year earlier, with growth in construction, trade and transportation, education and health, and financial activities.

Owen said Iowa is slowly eking out economic gains.

"We're not seeing great growth, but we're also not seeing great declines," he said.

Gronstal, the Senate leader, said Iowa has built in budget protections for "the ups and downs of the economy." It includes $700 million in reserve plus a projected ending balance of about $395 million.

"We've got some cushion in the state budget," he said.