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Iowa's revenue projected to dip this year before slight uptick in 2025
Gov. Reynolds: ‘Iowa’s economy remains strong and steady’
Caleb McCullough, Gazette-Lee Des Moines Bureau
Mar. 15, 2024 6:07 pm
DES MOINES — Iowa’s tax receipts will come in slightly lower than expected this year, but revenues will hold steady in 2025 according to the latest projections from a state panel that estimates annual revenue.
The projections are critical as state lawmakers begin the work of crafting a budget for the upcoming fiscal year, using the projections by the Revenue Estimating Conference to determine how much they can spend.
Income tax cuts for individuals and corporations will continue to drive down revenue from those sources, but state officials expect increasing consumer spending to increase revenues from sales tax.
The panel, which met on Friday, expects Iowa’s total revenue to be $9.63 billion this year, a decrease of about $219 million from last year and about $120 million lower than state officials estimated in December.
In fiscal year 2025, which begins July 1, revenue is expected to reach $9.7 billion, an increase of about 0.7 percent from 2024. That number would be down about $100 million from 2022, when lawmakers enacted income tax cuts that put Iowa on a path to a flat 3.9 percent tax rate in 2026.
State lawmakers will need to use the panel’s last projection from December when deciding how to spend the state’s tax dollars, because state law requires the lower of the two estimates to be used to create the budget. The 2025 estimate in December was $9.64 billion.
Iowa Department of Management Director Kraig Paulsen, who sits on the estimating board representing the governor’s office, said conservative spending by the Republican-led state government has put Iowa in a strong financial position. Paulsen said there is room to further cut taxes, which Iowa’s Republican leaders have called for.
“Thanks to this fiscal restraint, we think there is no reason to think the state cannot continue down the path of leaving more money in Iowans’ pockets,” Paulsen said.
In 2026, the projection gets more uncertain as two state agencies were nearly a billion dollars apart in their initial projections for that year’s income. The Department of Management and the nonpartisan Legislative Services agency each submit projections ahead of the board's quarterly meetings, and the panel has to reach an agreement between the two.
The Department of Management predicted a 3.5 percent revenue increase between 2025 and 2026, while the Legislative Services Agency predicted a 5.4 percent reduction. The panel eventually settled on a 1 percent decrease estimate, which would put revenue that year at $9.6 billion.
Paulsen said he expects a larger increase as the economy continues to grow. Jennifer Acton, the fiscal services director for the Legislative Services Agency, said she expects recent tax cuts and more refunds because of the way corporations are taxed to drag down the state’s revenue.
GOP: Republican polices to credit for ‘strong’ Iowa economy
Iowa Gov. Kim Reynolds said the Friday estimates show that Iowa is in a solid financial position.
“Even with the significant national economic challenges created by so-called 'Bidenomics,' Iowa’s economy remains strong and steady," she said in a statement provided by a spokesperson.
Reynolds has proposed a bill that would accelerate the 2022 tax cuts and reach a lower tax rate faster. Under Reynolds' proposal, Iowa taxpayers would pay a flat 3.5 percent income tax starting in 2025.
Reynolds has proposed spending $8.9 billion from the state’s general fund in next year’s budget, which would represent a 4.7 percent spending increase from the 2024 budget.
The state ended 2023 with a $1.83 billion budget surplus. The state’s taxpayer relief fund, which is used to fund tax cuts, is estimated to reach $3.68 billion this fiscal year, according to Reynolds’ budget recommendation.
Iowa Senate Majority Leader Jack Whitver, R-Grimes, said the projections show the success of Republicans’ fiscal policy and cutting income taxes.
“Our agenda has resulted in a strong Iowa economy, a balanced budget, almost $4 billion in the taxpayer relief fund, and a surplus this year of roughly $1 billion,” Whitver said in a statement. “Now is the time to continue to implement these policies and Senate Republicans look forward to building on our success this year with the House and Governor Reynolds to enhance the truly great condition of our state.”
Democrats: There’s no reason to not fund Iowa schools
In written statements, legislative Democrats criticized Republicans for failing to pass a school funding plan despite the legal deadline passing in February. Lawmakers have not passed a budget for state aid to schools as they continue to work out a controversial policy to overhaul the state’s area education agencies.
Rep. Timi Brown-Powers of Waterloo, the top Democrat on the House budget committee, said the Legislature should be pursuing an agenda that funds public schools and increases Iowans’ wages.
“We believe it’s time to make public schools our top priority again,” she said in a statement. “Today’s budget estimate confirms there is no fiscal reason for GOP lawmakers to continue stalling funding for public schools, it’s just all politics for them. As we learned again this week with 1,200 Iowans losing their jobs in Perry, more tax giveaways to corporations and the richest Iowans don’t give Iowans the wages or job security they deserve.”
Sen. Janet Petersen, D-Des Moines, said in a statement that lawmakers should focus on passing a budget over divisive social policies.
“We owe it to our constituents to fund our public schools, pass a balanced and responsible state budget, and then adjourn for the year,” said Petersen, the ranking member on the Senate budget committee. “Iowans aren’t asking for more politics and culture wars. They’re asking for a government that does its job.”