Iowa and Missouri are among the states turning to permanent tax relief measures with coffers swollen with better-than-projected tax collections.

States have varied in how they’ve doled out relief, some offering just one-time breaks, like Illinois, and others enacting permanent changes. The latest cuts from Iowa and Missouri come as fiscal clouds loom, with the potential for a recession as the Federal Reserve raises interest rates seeking to slow inflation.

State budgets are in a much better position and are structured to combat inflationary and macro pressures over the next several months, but slower economic growth and rising inflation do pose some downside risk, according to a Fitch Ratings report released over the summer.

Some critics of the permanent relief argue it could hurt states’ ability to weather a downturn without turning to reserves.

Iowa Gov. Kim Reynolds last week reported a $1.9 billion general fund balance for fiscal 2022 after closing the books June 30. That’s up from $1.24 billion for fiscal 2021 and $305 million in 2020. The numbers trigger a drop in the corporate income tax rate.

In addition to the surplus, the state closed the fiscal year with $830 million in reserves and $1.1 billion in a taxpayer relief fund.

Reynolds’ tax bill, signed last March, established a formula that reduces the corporate tax rate when net corporate income tax receipts exceed $700 million. Corporate taxes exceeded $850 million, triggering a drop in the top rate to 8.4% from 9.8%, reducing the number of corporate tax rates to two from three.

“Our fiscal health is strong and our tax code is more competitive than ever,” Reynolds said in a statement.

Under the March legislation, every fiscal year in which net corporate income tax receipts exceed $700 million, the surplus will be used to buy down the current top rate. New top rates would be determined each fiscal year that net corporate income tax receipts exceed $700 million, until a uniform 5.5% corporate income tax rate is achieved, at which time it would be capped. Once the rate is capped, excess tax revenue beyond $700 million will go into the state’s general fund.

The March package offered more sweeping changes beyond the corporate tax overhaul as it also established a flat 3.9% personal income tax rate and eliminated the tax on retirement income. The state beginning next year will reduce the number of tax brackets until the flat 3.9% takes effect in 2026 at a cost of $1.67 billion through 2026.

Democrats, who hold a legislative minority, opposed the corporate cut, saying more funds should go to education, mental health and other social programs.

The cost of the tax cuts has not impacted Iowa’s triple-A ratings. “Iowa’s Aaa rating reflects its strong fiscal management, low long-term liabilities and fixed cost burdens, and sound financial performance. The rating also considers the state’s economic stability despite some concentration in the agricultural sector,” Moody’s Investors Service said in a periodic review published earlier this year that did not involve a rating action.

Iowa’s fiscal recovery is notable as the state was hit especially hard early in the COVID-19 pandemic with non-farm payroll losses exceeding the national average and its job recovery lagging the nation late last year. The state’s $1.4 billion share of ARPA funds, in addition to $1.3 billion received by local governments, helped the state pay down an unemployment trust fund gap and fund workforce development, affordable housing, and other programs.

Missouri lawmakers during a special session called by Gov. Mike Parson last week signed off on a cut to personal income tax rates that carries an annual price tag of $764 million when fully implemented.

“Today’s action will provide real relief to taxpaying Missourians. Relief that is even more critical now as Missouri families face rising grocery bills, high gas prices, and record inflation,” Parson said in a statement. Lawmakers during their regular session had advanced one-time tax relief, but Parson vetoed it and pressed for the rate changes.

The legislation passed by the Republican-led legislature phases in cuts to the top tax rate for most taxpayers beginning next year that first reduces the rate to 4.95% from 5.3% with further reductions until it hits 4.5% based on revenue growth triggers tied to inflation. Democrats argued the changes favor high earners over low-income payers and those on fixed incomes.

Missouri reported over the summer that it closed out fiscal 2022 with a record general revenue balance of $4.9 billion, or 38% of total general fund revenues and more than double the surplus seen in 2021. State coffers were buoyed by higher than budgeted tax collections.

Income taxes rose 11.8% thanks to higher wages and sales tax rose 13.1% partially due to inflation, budget officials reported. The state budget office also attributed its flush coffers to the infusion of $2.6 of federal ARPA relief.

Reynolds and Parson are Republicans. Reynolds is seeking a new term in November. Parson won a new term in 2020.