State officials forecast $8.54 billion in revenue this fiscal year, but Democrats and advocates warn tax cuts are straining Iowa's finances.
On Friday, Iowa's state revenue forecasting panel projected modest growth in tax collections over the next two years, offering a cautiously optimistic outlook for the state's economy even as Democrats and budget advocates warned that years of income tax cuts have created an unsustainable gap between state spending and revenues.
The three-member Revenue Estimating Conference unanimously approved a forecast of $8.54 billion in net general fund revenue for the current fiscal year, which began July 1. That's a 2.8% increase over the previous year.
The panel projected revenue will grow another 3.4% in fiscal 2028, reaching $8.83 billion.
The estimates will help guide state lawmakers and Iowa's next governor as they craft the budget for the fiscal year beginning July 1, 2027.
The projections come after Iowa closed its books on the fiscal year that ended June 30 with a $634.6 million, or 7.1%, decline in net general fund revenue compared with the previous year. It marked the third consecutive year of declining revenue following nine years of increases.
Jennifer Acton, fiscal division director for the nonpartisan Legislative Services Agency, attributed much of the decline to Iowa's flat 3.8% individual income tax rate, which took full effect in fiscal 2026.
Still, revenue collections finished approximately $205 million above the conference's March estimate, reflecting stronger-than-anticipated economic activity.
Gov. Kim Reynolds, a Republican, characterized Friday's projections as evidence that the state's economy remains resilient. In a statement, Reynolds said upward adjustments since March signal improved economic activity.
“For nearly 10 years, my administration and the Republican-led Legislature have prioritized the type of fiscal responsibility and conservative, pro-growth policies that generate measurable results,” she said. “Today, Iowa’s economy is well positioned to sustain growth, maintain stability and continue to invest in the priorities Iowans value most.”
Revenue panel strikes compromise
Friday's projections represented a compromise between more optimistic estimates from Reynolds' administration and a more cautious forecast from legislative analysts.
Kraig Paulsen, director of the Iowa Department of Management and conference chairman, initially recommended 3.2% revenue growth for fiscal 2027, compared with the Legislative Services Agency's 2.3% estimate.
Acton from the Legislative Services Agency rejected the administration's higher projection. Paulsen suggested splitting the difference, noting the conference will revisit its projections in December. Members ultimately agreed to a 2.8% growth estimate, reducing the administration's personal income tax revenue projection by approximately $36 million.
They took a similar approach for fiscal 2028, lowering projected personal income tax collections by $86.2 million to reach an overall revenue growth estimate of 3.4%.
Paulsen emphasized afterward that all the proposed forecasts anticipated increasing revenues.
“I think LSA in this case, I think wanted to just take a little bit more conservative perspective than what I had worked up,” he said.
Economic growth tempered by uncertainty
State officials cited several encouraging economic indicators, including strong consumer spending, low unemployment and higher-than-expected tax collections.
General fund receipts through September were running more than 6% above the same period last year, with sales and use tax collections increasing 10.5%.
Iowa's unemployment rate stood at 3.2%, although the state had added just 700 jobs over the previous year through August.
Acton also highlighted inflation, rising borrowing costs, declining consumer confidence and uncertainty surrounding tariffs and agricultural markets.
Annual inflation reached 3.7% in September, while higher fuel prices and wet weather have complicated Iowa's fall harvest.
Jeff Plagge, the conference's public member, said uncertainty remained a significant concern among bankers and businesses.
“Higher rates have clearly affected housing activity, with fewer housing starts and home purchases,” Plagge said.
Budget concerns fuel political dispute
The projections immediately renewed debate over the sustainability of Iowa's tax cuts and the state's reliance on reserves to balance its budget.
Anne Discher, executive director of the progressive policy organization Common Good Iowa, said projected fiscal 2027 revenue falls more than $1.1 billion below the budget lawmakers approved in May. She warned that even a flat budget in fiscal 2028 would leave a shortfall exceeding $800 million.
“This is not sustainable,” Discher said in a statement.
Discher also criticized a proposed constitutional amendment on November's ballot that would make it harder for lawmakers to increase corporate or individual income tax rates.
State Rep. Megan Srinivas, D-Des Moines, the ranking Democrat on the House Appropriations Committee, said the estimates raised questions about Republicans' fiscal priorities.
“With Iowa facing another billion-dollar budget deficit, today’s revenue estimate raises serious questions about the state’s fiscal priorities after 10 years of Republican lawmaker control,” Srinivas said.
Sen. Janet Petersen, D-Des Moines, the ranking Democrat on the Senate Appropriations Committee, similarly accused Republicans of depleting the state's financial reserves.
“What comes next for Iowans while the majority party burns through the state’s safety net funds at this unsustainable pace?” Petersen said.
The projected revenue gap does not necessarily translate into an immediate budget deficit. Iowa has accumulated substantial cash reserves, including money in its Taxpayer Relief Fund, which lawmakers have used to support spending as income tax collections decline.
Paulsen said Friday that Iowa had approximately $4.6 billion in cash on hand, including about $3.2 billion in the Taxpayer Relief Fund. The state ended fiscal 2026 with a balance of approximately $1.6 billion. He maintained that Iowa remains financially sound.
“I would say the state doesn't have a revenue problem, and we're clearly in an extremely strong cash position,” Paulsen said. “So, assuming we continue to see the growth, which we all-that's what we agreed to today in this meeting, yeah, I think the state's in a great spot.”
When asked whether the Taxpayer Relief Fund could be exhausted before revenue growth catches up with spending, Paulsen expressed confidence in the state's financial outlook.
“I believe the taxpayer relief fund will last long enough that the revenues will catch up,” he said.
Paulsen acknowledged, however, that the state's financial outlook also depends on future spending decisions.
The conference is scheduled to meet again in December to update its forecasts, providing another assessment of Iowa's finances before lawmakers convene in January.
