Iowa lawmakers will have to dip into the state’s reserve funds for next year’s budget as state tax projections estimate the state’s revenue will decrease by $640 million between fiscal 2025 and fiscal 2026.
The state’s Revenue Estimating Committee projected the state will take in $8.51 billion in fiscal 2026 as the governor’s 3.8 percent flat tax, which took full effect on Jan. 1. Iowa Gov. Kim Reynolds has proposed a $9.4 billion budget, using roughly $2 billion in reserve funds.
In a statement Thursday, Reynolds said the decreasing revenues was showing her tax cuts were working.
“We cut taxes to let Iowans keep more of their hard-earned money and that’s exactly what today’s REC numbers reflect,” Reynolds said Thursday. “In partnership with the legislature, we will continue our responsible budgeting practices and spending discipline. This is what responsible, growth-oriented fiscal stewardship looks like.”
Early estimates for fiscal 2027 show the state’s revenue increasing — after decreasing for the past three years as tax cuts take effect.
Iowa Department of Management Director Kraig Paulsen said the projections show Iowa is in a strong financial position.
“Unlike so many states, Iowa is in a great financial position,” Paulsen said. “And because of our strong fiscal health, Iowa has the flexibility to address the priorities of Iowans.”
However, the committee’s March estimate for fiscal 2026 is $221 million less than their December estimates due to a volatile economy.
Legislative Services Agency Fiscal Services Director Jennifer Acton said while the fiscal health of the state is stable, the economy is showing signs of slowing.
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“Although the current economy is relatively steady, it is showing signs of slowing,” Acton said. “In addition, there’s a lot of economic uncertainty and fluidity in both the national and local economies.”
Acton said consumer confidence is on the decline. Consumer confidence declined by 7 points in February 2025, according to the U.S. Conference, a think tank that studies the market. Uncertainty around tariffs and President Donald Trump’s economic action has sent it to the largest decrease since August 2021.
“This decrease comes amid economic uncertainty in both the markets and with consumers due to persistent inflationary pressures, widespread policy changes and concerns over potential tariffs that may result in trade wars,” Acton said. “Which could further strain household budgets with overall higher prices for goods and services.”
Sen. Janet Petersen, D-Des Moines, and the ranking member on the Senate Appropriations Committee, said the estimates show that Republicans are not responsibly budgeting by using reserve funds to fund the budget.
“Today’s REC projections confirm that, for the foreseeable future, Iowa will spend more money than it takes in and dip into the state’s reserves to cover the difference,” Petersen said. “It’s not just a one-time dip into our reserve accounts to pay for private school vouchers and Iowa’s lack of real revenue growth. Billions of dollars will be pulled from Iowa’s reserves in the next few years to balance the budget.”