The state of Iowa’s spending is once again expected to exceed its revenue by about $1 billion in the next fiscal year, according to the latest estimates Thursday from the Revenue Estimating Conference.
Tax collections have been declining because of state tax cuts, and last year’s federal tax cuts have added to that drop. The REC slightly reduced its revenue estimates compared to December, which means lawmakers will have less money than expected to work with as they begin to craft a budget for the next fiscal year.
Iowa is facing a nearly $1.4 billion budget deficit this fiscal year, the first full budget year with Iowa’s income tax cuts fully phased in at a single rate of 3.8%.
Next fiscal year, the state is expected to take in $1.2 billion less than Gov. Kim Reynolds has proposed spending.
Iowa Department of Management Director Kraig Paulsen said he is confident the money the state has saved up – and Iowa’s economic growth – will cover these budget gaps going forward.
“My confidence is higher today than it was in December … I mean, there’s still things out there that we can’t control in the state that could upset the apple cart,” he said. “But I feel pretty good right now.”
Democratic leaders said the state is in a “fiscal death spiral” caused by Republican-led tax cuts, and that the GOP majority needs to find a way to fix it.
“We have been promised that these massive tax cuts would pay for themselves, and they simply have not,” said House Minority Leader Brian Meyer, D-Des Moines. “The question is very simple: When are Iowans going to see this growth, and when are they going to see the budget deficits go away?”
The Republican-led Legislature saved about $6 billion in recent years to cover budget gaps caused by their sweeping tax cuts. However, revenue has declined faster than initially expected, leaving the state to dig deeper into its reserves.
The state budget for the current fiscal year that ends June 30 is $9.5 billion, but the state is expected to bring in $8.1 billion. Revenue for the next fiscal year is estimated to be $8.5 billion, and Reynolds has proposed a $9.7 billion budget.
Republican leaders said the state is in a strong financial and economic position, and the tax cuts are helping Iowans.
Reynolds said the reduced revenue estimates Thursday were related to corporate tax cuts at the federal level. Iowa automatically adopts some federal tax changes.
“My administration’s fiscal discipline has allowed for extending the benefits of the One Big Beautiful Bill to Iowa taxpayers,” she said. “As we plan for Fiscal Year 2027, my administration will continue to work to keep spending in check and lower the property tax burden on Iowans.”
Sen. Janet Petersen, D-Des Moines, said Republicans have made an “unprecedented mess of the state’s budget.”
“Single-party control of the state budget got Iowans into this mess with another billion-dollar deficit on the horizon,” she said. “Republican lawmakers can’t continue burying their heads in the sand. If we don’t change direction quickly, the majority party will march Iowans right off the fiscal cliff.”
Senate Majority Leader Mike Klimesh, R-Spillville, said Iowa continues to have a healthy amount of money in reserve funds.
“The goal of the tax cut is to return taxpayers’ overpayment to state government and provide permanent, pro-growth tax relief, and that goal is being achieved,” he said. “Senate Republicans will continue focusing on responsible, sustainable budgeting and look forward to again compiling a conservative, sustainable budget in the upcoming weeks that puts the taxpayer first.”
