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Iowa revenue is expected to decrease in the next two years as tax cuts take effect

the three members of the revenue estimating conference sit at a table in the iowa capitol
John Pemble
Revenue Estimating Conference members David Underwood, Kraig Paulsen and Holly Lyons met at the Iowa Capitol Thursday.

Iowa’s revenue forecasters said Thursday they expect the state to bring in more money than expected in the current fiscal year. But state revenue growth is expected to drop off soon, andrevenue will begin to decreasein the next two fiscal years.

That’s because the tax cuts signed into law last week will start to phase in, and the impact of federal pandemic relief funding and rapid growth during pandemic recovery is expected to fade.

Iowa Department of Management Director Kraig Paulsen said the state is still in a strong financial position, and the Republican majority is planning a budget that’s a lot less than what they could spend.

“I don’t foresee cuts to any services,” Paulsen said. “The reserve funds are full. The taxpayer relief fund at the end of this fiscal year is going to have close to $2 billion in it. So in the foreseeable future, no, I don’t really see any of those problems.”

Some Democrats have raised concerns that falling state revenues and increasing costs will eventually require cuts to state services, or least make less money available to improve child care, mental health and affordable housing access.

“Iowa’s budget experts predicted a steep decline in state revenues next year just after hundreds of millions in new tax giveaways to corporations and millionaires were signed into law,” Rep. Jo Oldson, D-Des Moines, said in a statement. “Every tax dollar Republican politicians hand over to corporations and millionaires costs Iowa families and puts the futures of more Iowa kids at risk.”

The Revenue Estimating Conference is forecasting Iowa’s revenue will grow 4.2 percent this fiscal year to $9.17 billion. Last fiscal year saw unusually high revenue growth of 11 percent.

Next fiscal year, which begins July 1, state revenue is expected to decrease by 0.2 percent. The following year, the REC estimates state revenue will decrease by 2.1 percent to $8.96 billion.

Gov. Kim Reynolds said in a statement the estimates reaffirm why she wanted to pass tax cuts.

“Our bold tax cuts were necessary as we continue to over-collect Iowans’ hard-earned money,” she said. “But with the new tax law of a flat and fair 3.9 percent individual tax rate by 2026, and eliminating the state income tax on retirements, among other tax reform, Iowans will see more money in their pockets and not in the hands of the government.”

For the next fiscal year, House Republicans are proposing spending $8.27 billion on the state budget, and Senate Republicans are proposing spending $8.2 billion. Both are far below the $9.17 billion in expected revenue.

House Speaker Pat Grassley, R-New Hartford, said the state can handle the revenue reductions with the planned budget surplus and the new tax law’s use of the Taxpayer Relief Fund. Under the new law, when annual revenue growth is under 3.5 percent, money from that fund can be used to fill budget gaps.

“I think that’s what’s so important about the way we crafted the bill is we implemented it over a few years and have those additional resources around if there is something that we don’t foresee,” Grassley said.

Revenue forecasters said Russia’s invasion of Ukraine, rising energy prices and inflation are causing more uncertainty in their estimates of Iowa’s revenue growth.

Katarina Sostaric is IPR's State Government Reporter