Iowa will have to dip further into its reserves to cover a larger budget gap than expected as federal tax changes add to the impact of state tax cuts, according to the state’s revenue estimating panel.
The panel estimated Thursday that tax dollars coming into state coffers will decline by hundreds of millions of dollars more than their March estimates, largely because of the major tax and spending law known as the One Big Beautiful Bill Act.
Iowa automatically adopts some changes to the federal tax code, which has started to deepen declines in state revenue that were already expected because of state tax cuts.
“We had not accounted for that in the March [estimate],” said Kraig Paulsen, the governor’s budget director and chair of the Revenue Estimating Conference. “And then the economy was just a little bit weaker than what we thought it was going to be in March.”
State revenue will decline an estimated 9% this year instead of the initial estimate of 4.8%, according to the panel.
The state is expected to bring in $8.1 billion this fiscal year, while the Iowa Legislature planned to spend $9.4 billion, leaving a $1.3 billion gap.
For the fiscal year that ended June 30, the state took in about $200 million less than the panel estimated in March. Republican lawmakers have saved up $6 billion to cover budget gaps caused by the sweeping income tax cuts they passed in recent years.
The state is expected to bring in $8.1 billion this fiscal year, while the Iowa Legislature planned to spend $9.4 billion, leaving a $1.3 billion gap.
“So is this where we’d want to be? Is it the most comfortable spot? No,” Paulsen said. “But we’re in a really good spot, and it was planned for. And the state of Iowa is in a good financial condition.”
Democrats disagree. They said Republicans are mismanaging the state’s finances, and there are warning signs for Iowa’s economy.
House Minority Leader Brian Meyer, D-Des Moines, said Republicans have thrown the state into “a fiscal death spiral.”
“And that death spiral is a result of their corporate tax cuts, [private school] vouchers and tax cuts for the wealthy in this state,” he said. “And unfortunately, the economic development and growth that was promised six years ago with these tax cuts has never materialized.”
Republican Gov. Kim Reynolds said Iowa is in a strong financial position.
“Now that Iowa’s 3.8% flat income tax is fully implemented, Iowans have more of their own money today than they did at this same time last year,” she said. “As a result, the state’s general fund revenue is down just as we projected and responsibly planned for, and just as it should be. Government should only ask from its taxpayers what it needs to operate effectively on their behalf.”
Senate Democratic Leader Janice Weiner of Iowa City said Republicans didn’t plan for the current situation.
“Our economy is shrinking,” she said. “Our revenues are collapsing. We are spending more than we’re taking in.”
Weiner said Iowans don’t feel like they are better off financially than they were a few years ago.
Jennifer Acton, fiscal division director of the nonpartisan Legislative Services Agency, said state revenue is expected to stabilize and start increasing again in fiscal year 2027 “absent an economic downturn.”
She said there is “substantial economic uncertainty” that is beginning to affect consumer confidence. Acton said Iowa’s GDP contracted by 6.1% in the first quarter of this year, and grew by 3.7% in the second quarter.
