Increasingly, we live in a world where the federal funding we have integrated into our local economies cannot be relied upon. At the same time, there are no guarantees that the lost funds will be returned to the economy in other forms if they are removed. There is substantial talk of deficit reduction and of selective tax cuts, but there is no sign that funds held at the federal level will be broadly distributed to the local economies which will bear the loss.
This is a simple analysis of what the Iowa economy would look like if four major flows of federal funding were cut off:
- Agricultural Subsidies
- Social Security
- Medicare
- Medicaid (the federal share only)
No assumptions are made of any alternative flows that would replace these losses. This is simply a look at general expectations assuming these funding flows simply disappear.
Data for this exercise were collected for 2023. This is the last year for which the full range of data could be obtained. All data except the level of agricultural subsidies was sourced from the United States Bureau of Economic Analysis (BEA). Agricultural subsidy totals were obtained from the Environmental Working Group, because the BEA has recently stopped publishing detailed agricultural industry statistics at the local level.
The effects of removing each of the four funding flows were analyzed using an impact model built with Iowa economic coefficients obtained from the BEA Regional Input-output Modeling System (RIMS II). Each of the four major funding sources was run separately, sums were taken, and a comparison was made to Iowa totals for actual 2023 gross domestic product and employment. The table below shows the results. Dollar values are in billions.
What all falls out is a loss in federal funding of almost $30 billion. As these losses percolate through the Iowa economy, they will result in
- Lost economic transactions totaling $42 billion
- Lost economic value added (GDP) totaling $24 billion
- Lost business income, interest payments, rents, and direct production taxes of $10 billion
- Lost labor income (payrolls) of nearly $14 billion
- Over 268,000 jobs lost
At the end of the day, Iowa can expect to see its GDP drop by almost 12 percent and its employment totals to drop by 12.5 percent if these funding flows are terminated without replacement. Iowa is not unique among states with respect to the expected impacts if major federal funding streams dry up.
Additionally, we can use payrolls as a proxy for production and income to roughly estimate Iowa tax losses resulting from this. Iowa collects approximately 8.75 cents in general revenue for every dollar in statewide payroll. At this rate, the loss of payrolls resulting from losing federal flows of funds would result in a reduction of state general tax revenue by over $1.2 billion. This would further cut expenditures throughout the state and magnify the losses listed above.
Regardless of the pros and cons of government interventions in the economy, the economy has been built up over decades on the incentive systems driven by those interventions. It would behoove us all to be a patient and cautious in making changes.
