The amount of tax revenue collected by the state in the coming budget year will be less than current state spending, according to new projections from the state’s nonpartisan fiscal estimating panel.
The roughly $200 million shortfall, driven largely by less state income tax revenue as a result of recent tax cuts, means when state lawmakers craft the next state budget they will need to either reduce some current state spending or dip into the more than $6 billion in state reserves.
The three-member Revenue Estimating Conference published the projections during its meeting Thursday at the Iowa Capitol.
Iowa is projected to collect $8.7 billion in the 2026 state budget year, which begins July 1, according to the panel’s estimates. In the current state budget year, Iowa is spending $8.9 billion.
If the panel’s projection is accurate, state lawmakers when they craft the next state budget during the 2025 legislative session will need to reduce state general fund spending by roughly $200 million or use unspent money in the state general fund or one of the state’s reserve accounts.
As of May, there was $2.4 billion unspent in the state’s general fund for the current budget year, according to a report from the state’s nonpartisan Legislative Services Agency. The state also has another $3.7 billion in its Taxpayer Relief Fund, which was created to cover any potential shortfalls as the result of state tax reductions.
The projected decrease in 2026 budget year revenue is driven largely by reduced tax collections resulting from tax cuts that created a 3.8 percent state income tax rate for most working Iowans starting in 2025.
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The state will see a drop of $687 million in personal income tax collections in the 2026 budget year, a 12.3 percent drop from the current budget year, according to the panel’s projections.
The tax cuts, enacted over multiple bills and starting in 2019, have gradually reduced the number of state income tax brackets and lowered rates. In 2023 there were four brackets ranging from 4.4 percent to 6 percent, and in 2024 there were three brackets ranging from 4.4 percent to 5.7 percent.
In 2025, most working Iowans will pay a 3.8 percent state income tax rate.
While statehouse Democrats sounded alarms over the projections, Iowa Department of Management Director Kraig Paulsen, an REC member appointed by Gov. Kim Reynolds and a former Republican Speaker of the Iowa House, said between the state’s reserve accounts and what he described as a fiscally responsible state government, he believes Iowa tax revenues will grow to support state spending before those reserve accounts are exhausted.
“The trick on that is trying to get where you get that projection correct, so that as you draw that (budget surplus) down, you never get on the bottom side of that,” Paulsen told reporters after Thursday’s meeting. “And I think so far they’ve been making — and by that, I mean the General Assembly (and) governor — been making prudent decisions that will draw that down at a rate that is sustainable, and the state will grow right out of it.”
Gov. Kim Reynolds, in a statement, said the state income tax cuts are “working as designed.” Reynolds has in the past advocated for a complete elimination of the state income tax.
“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,” Reynolds’ statement said. “Our state’s fiscal health remains strong, and Iowa’s economy continues to grow.”
Statehouse Democrats criticized the budget priorities of statehouse Republicans, who by virtue of their majorities have complete control of the state lawmaking and budgeting process.
“Today’s negative revenue projections confirm what most Iowans feel: the Reynolds economy is not working for everyday people,” Iowa Rep. Timi Brown-Powers, a Democrat from Waterloo on the House’s budget committee, said in a statement. “Tax breaks for corporations and the wealthy combined with vouchers have created an unsustainable budget while costs keep rising for Iowa families.”
Iowa Sen. Janet Petersen, a Democrat from Des Moines on the Senate’s budget committee, in a statement expressed concern for state public school funding and other Democratic priorities because of shrinking overall state tax revenue and increasing costs to the state’s new private school financial assistance program.
“Republican lawmakers’ and Gov. Reynolds’ priorities put private school vouchers and corporate tax giveaways ahead of our kids in public schools, seniors in nursing homes, and tax relief for working families,” Petersen’s statement said.
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The roughly $200 million shortfall, driven largely by less state income tax revenue as a result of recent tax cuts, means when state lawmakers craft the next state budget they will need to either reduce some current state spending or dip into the more than $6 billion in state reserves.
The three-member Revenue Estimating Conference published the projections during its meeting Thursday at the Iowa Capitol.
Iowa is projected to collect $8.7 billion in the 2026 state budget year, which begins July 1, according to the panel’s estimates. In the current state budget year, Iowa is spending $8.9 billion.
If the panel’s projection is accurate, state lawmakers when they craft the next state budget during the 2025 legislative session will need to reduce state general fund spending by roughly $200 million or use unspent money in the state general fund or one of the state’s reserve accounts.
As of May, there was $2.4 billion unspent in the state’s general fund for the current budget year, according to a report from the state’s nonpartisan Legislative Services Agency. The state also has another $3.7 billion in its Taxpayer Relief Fund, which was created to cover any potential shortfalls as the result of state tax reductions.
The projected decrease in 2026 budget year revenue is driven largely by reduced tax collections resulting from tax cuts that created a 3.8 percent state income tax rate for most working Iowans starting in 2025.
ADVERTISING
The state will see a drop of $687 million in personal income tax collections in the 2026 budget year, a 12.3 percent drop from the current budget year, according to the panel’s projections.
The tax cuts, enacted over multiple bills and starting in 2019, have gradually reduced the number of state income tax brackets and lowered rates. In 2023 there were four brackets ranging from 4.4 percent to 6 percent, and in 2024 there were three brackets ranging from 4.4 percent to 5.7 percent.
In 2025, most working Iowans will pay a 3.8 percent state income tax rate.
What Iowa leaders are saying
While statehouse Democrats sounded alarms over the projections, Iowa Department of Management Director Kraig Paulsen, an REC member appointed by Gov. Kim Reynolds and a former Republican Speaker of the Iowa House, said between the state’s reserve accounts and what he described as a fiscally responsible state government, he believes Iowa tax revenues will grow to support state spending before those reserve accounts are exhausted.
“The trick on that is trying to get where you get that projection correct, so that as you draw that (budget surplus) down, you never get on the bottom side of that,” Paulsen told reporters after Thursday’s meeting. “And I think so far they’ve been making — and by that, I mean the General Assembly (and) governor — been making prudent decisions that will draw that down at a rate that is sustainable, and the state will grow right out of it.”
Gov. Kim Reynolds, in a statement, said the state income tax cuts are “working as designed.” Reynolds has in the past advocated for a complete elimination of the state income tax.
“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,” Reynolds’ statement said. “Our state’s fiscal health remains strong, and Iowa’s economy continues to grow.”
Statehouse Democrats criticized the budget priorities of statehouse Republicans, who by virtue of their majorities have complete control of the state lawmaking and budgeting process.
“Today’s negative revenue projections confirm what most Iowans feel: the Reynolds economy is not working for everyday people,” Iowa Rep. Timi Brown-Powers, a Democrat from Waterloo on the House’s budget committee, said in a statement. “Tax breaks for corporations and the wealthy combined with vouchers have created an unsustainable budget while costs keep rising for Iowa families.”
Iowa Sen. Janet Petersen, a Democrat from Des Moines on the Senate’s budget committee, in a statement expressed concern for state public school funding and other Democratic priorities because of shrinking overall state tax revenue and increasing costs to the state’s new private school financial assistance program.
“Republican lawmakers’ and Gov. Reynolds’ priorities put private school vouchers and corporate tax giveaways ahead of our kids in public schools, seniors in nursing homes, and tax relief for working families,” Petersen’s statement said.
Iowa tax revenue to dip below current spending next year, state estimating panel projects
The Iowa Revenue Estimating Conference’s latest projections reflect a dip in state revenue primarily driven by reductions in state income tax rates
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