Sun. Mar 16th, 2025

Jennifer Acton, right, director of the Fiscal Services division of the Legislative Services Agency, spoke on revenue projections for the state of Iowa at the Revenue Estimating Conference March 13, 2025. Acton is a member of the REC alongside Kraig Paulsen, center, the state budget director and Jeff Plagge, director for Northwest Bank in Spencer. (Photo by Robin Opsahl/Iowa Capital Dispatch)

Members of the Iowa Revenue Estimating Conference said Thursday that although national economic uncertainty is making clear budget projections difficult, the state was still in a sound fiscal position as recently approved tax cuts take effect.

The Revenue Estimating Conference (REC) met Thursday to review and update their projections on the state budget. Lawmakers will begin budget negotiations for Fiscal Year 2026, which begins July 1, 2025, in coming weeks.

For FY 2025, the REC estimated in December that Iowa would have roughly $9.15 billion in tax receipts, or a 6.2% drop from the previous fiscal year. The panel lowered that estimate Thursday to $9.13 billion, or 6.4%, based on analysis from the nonpartisan Legislative Services Agency. The updated figures represent a drop of $621 million.

Kraig Paulsen, director of the Iowa Department of Management and chair of the REC, said the changes are coming from higher tax withholdings than the REC had projected, but that those changes are also reflected in FY 2025 estimates.

There was a bigger revenue decrease when looking ahead to FY 2026. The REC estimated in December state revenues will fall by 4.7% to $8.7 billion in the upcoming fiscal year. That amount was updated Thursday to $8.5 billion, a decrease of 6.9%. The updated projection shows Iowa having a revenue decrease of $626.7 million when compared to FY 2025.

Gov. Kim Reynolds’ $9.4 billion budget proposal, released in January, would spend more than incoming state revenues based on the REC’s December projection for Fiscal Year 2026. It would draw money from the state’s general fund, reserve funds and the Taxpayer Relief Funds.

With the current estimate, revenues are expected to be $200 million less than projected in December. Paulsen said the governor’s proposed budget for the upcoming year would not necessarily be affected by the difference in projected tax receipts, as those additional needed funds will come out of unspent state money from the current fiscal year.

“It’s coming out of the ending balance in her proposed budget,” Paulsen said. “There’s a transfer from some laws that the Legislature changed last year that will make a transfer out of the Taxpayer Relief Fund into the ending balance that will happen … when we close out the books.”

Much of the decrease in state revenues was expected, Paulsen said. In January, the Iowa law lowering the state’s individual income tax rate to a flat 3.8% rate went into effect, and corporate taxes are decreasing gradually from 7.1% to a flat rate of 5.5% each year that the state has more than $700 million in corporate tax revenue.

“There are no surprises today,” Paulsen said. “Between the tax cuts enacted and the economic headwinds that have existed for well over a year now, revenues have tightened. However, the spending discipline by our elected leaders — that is the governor and the General Assembly — continue to put the state in a position where the needs of Iowans can be met and we can weather through this tighter time.”

In a news release, Sen. Janet Petersen, D-Des Moines, criticized Republican lawmakers and Reynolds for making budgeting decision that rely on the use of one-time funds in the state’s reserves and Taxpayer Relief Fund to fund tax cuts and the state’s Education Savings Account program. The ESA program will begin allowing Iowans to access state dollars to use for private school tuition and associated costs without restrictions based on family income beginning in the 2025-2026 school year.

Petersen made a Freedom of Information Act request to the Iowa Department of Management requesting the public release of the state’s five-year financial plan. These figures were released, showing plans to transfer money from the Taxpayer Relief Fund from FY 2026 through 2030.

Petersen said the numbers are startling. “It’s not just a one-time dip into our reserve accounts to pay for private school vouchers and Iowa’s lack of real revenue growth. Billions of dollars will be pulled from Iowa’s reserves in the next few years to balance the budget. Republicans are breaking their own rule of using one-time funds for ongoing expenses, and Iowa taxpayers are footing the bill.”

Reynolds released a statement Thursday stating that the REC projections show Iowa in a strong fiscal position.

“We cut taxes to let Iowans keep more of their hard-earned money and that’s exactly what today’s REC numbers reflect,” Reynolds said. “With $2.05 billion in the ending balance, $961.2 million in reserve funds, and $3.75 billion in the Taxpayer Relief Fund, Iowa remains on a strong, fiscally sustainable path. In partnership with the legislature, we will continue our responsible budgeting practices and spending discipline. This is what responsible, growth-oriented fiscal stewardship looks like.”

While REC members said Iowa is in a solid position, economic impact of potential tariffs and other decisions made by President Donald Trump and his administration make it difficult to make solid economic projections. Jennifer Acton, the director of the Fiscal Services division of the LSA, said though the economy is currently “relatively steady, it is showing signs of slowing.”

“Compared to where we were in December, there are a lot more variables at play, which results in more uncertainty,” Acton said. “This can lead to more volatility in both the national and Iowa economies, and creates challenges for revenue forecasting. Things to watch: the effect of tariffs on agriculture and manufacturing, corn and soybean prices, fluctuations in interest rates and the effects of stock market volatility on consumers. With all that being said, Iowa continues to be in a solid financial position.”

Acton said that with economic uncertainties, projecting state revenues for FY 2027 is “challenging,” but that LSA is estimating an increase in state revenues “due to estimated economic growth.”