Iowa budget faces $200M shortfall once income tax cut takes effect

DES MOINES, Iowa (Gray Media Iowa Capitol Bureau) - A projection from the Iowa Revenue Estimating Conference says that the state will bring in less tax revenue in the next budget year than what the state is currently spending.

At the quarterly Revenue Estimating Conference meeting Thursday, members said the economy keeps getting better for Iowans.

Jennifer Acton, a member on the panel, said, “Inflation has begun to retreat closer to historic levels, with housing being the primary lag. Gas prices have dropped over the summer and as of October 7th, we’re averaging $3.17 per gallon nationally, down from $3.81 per gallon a year ago.”

Though there’s still some pain points. “Iowa has begun to see some weakening in the agriculture and manufacturing sectors resulting in reduced jobs due to lower crop and commodity prices,” she said.

But let’s take a look at the state government’s health:

Right now, Iowa’s income tax rate tops out at 5.7%. Next year, everyone’s tax rate will be 3.8%.

Once those cuts take effect, the state is projected to bring in $687 million less for the coming year.

Kraig Paulsen, Director of the Iowa Department of Management, said, “But this was expected with the enactment of the tax cuts that were passed last session. However the available revenue to spend this fiscal year is significantly above the dollars spent and there is no issue with meeting the needs of Iowans in Fiscal Year 25.”

In the 2026 budget year, the state is projected to collect $8.7 billion. In the current budget, the state is spending $8.9 billion.

The state’s economy is growing which will make up for much of that, but it still means lawmakers will have $200 million less overall to work with.

Lawmakers have a few ways they can address the shortfall when the legislative session begins in January. They could cut spending by $200 million. The state legislature also has about $6 billion in various state reserves they can tap into if they don’t want to cut spending.

Still, Paulsen said, there’s room for more tax cuts. “I think as we grow into this and clearly when you look at those underlying numbers and see the growth, I think that opportunity will exist again,” he said.

In a statement, Governor Kim Reynolds says the tax cuts are working.

“The tax cuts we’ve enacted are working as designed,” said Gov. Reynolds. “As I’ve said, the government has been taking in too much taxpayer money. We fixed that by cutting taxes and taking in less. That means Iowans get to keep more of what they earn, and that’s how it should be. Our State’s fiscal health remains strong, and Iowa’s economy continues to grow.”

Democrats aren’t as optimistic.

State Rep. Timi Brown-Powers of Waterloo says tax breaks for corporations and wealthy Iowans combined with private school vouchers have created an unsustainable budget.

“Today’s negative revenue projections confirm what most Iowans feel, the Reynolds economy is not working for everyday people. Tax breaks for corporations and the wealthy combined with vouchers have created an unsustainable budget while costs keep rising for Iowa families. Just last week, a report found Iowa has the worst wage gap in the nation between CEOs and workers. While the rest of the country is experiencing growth in jobs, personal income, and economic momentum, Iowans are facing layoffs and rising costs. Iowans are tired of politics getting in the way of progress, it’s time to put people over politics,” Brown-Powers said.

The voucher program is projected to cost about $1 billion over the first four years.

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Conner Hendricks covers state government and politics for Gray Media-owned stations in Iowa. Email him at conner.hendricks@gray.tv; and follow him on Facebook at Conner Hendricks TV or on X/Twitter @ConnerReports.

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