Iowa lawmakers will need to use some of the state’s savings to cover part of the state budget in the next fiscal year, after revenue forecasters estimated Thursday that Iowa will bring in about $400 million less next year than it spent this year.
The latest estimates show Iowa is expected to see state revenue decline by $1.2 billion over two years, mostly because of major income tax cuts that went into full effect in January.
The Revenue Estimating Conference now predicts the state will bring in about $8.5 billion in Fiscal Year 2026, down from the December estimate of $8.7 billion. The state is spending $8.9 billion on government services this year.
Republican leaders say the tax cuts, which set a single personal income tax rate of 3.8%, are working as intended, and they’ve saved up enough to avoid budget cuts. But Democrats say it’s not responsible to use one-time money to pay for ongoing expenses.
Kraig Paulsen, the governor’s budget director, said revenues have “tightened” because of tax cuts and economic headwinds.
“However, the spending discipline by our elected leaders — that is, the governor and the general assembly — continues to put the state in a position where the needs of Iowans can be met, and we can weather through this tighter time,” he said.
The estimate for the current fiscal year was reduced slightly, to $9.1 billion. Paulsen said that confirms the state will have enough revenue to pay for this year’s budget. He also said the governor’s proposed budget for next year is still well within the legal spending limit of $10.8 billion.
With the new revenue estimate, Republican Gov. Kim Reynolds’ proposed $9.4 billion budget would require the use of about $900 million from state reserves.
With the new revenue estimate, Republican Gov. Kim Reynolds’ proposed $9.4 billion budget would require the use of about $900 million from state reserves.
She said the projections reflect her efforts to cut taxes “to let Iowans keep more of their hard-earned money.”
“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,” Reynolds said. “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.”
Rep. Timi Brown-Powers of Waterloo, the top Democrat on the House Appropriations Committee, said the estimates “confirm an impending budget crisis created by Republicans.”
“In 2026, Republicans will be spending more than the state brings in, using one-time money for ongoing expenses,” she said. “Their reckless tax breaks for millionaires and corporations come at the expense of kids in public schools and will raise costs and property taxes for Iowa families. Iowans are ready for a budget that puts people over politics and actually lowers costs for Iowans.”
House Speaker Pat Grassley, R-New Hartford, said dipping into savings “was always part of the plan,” and that’s why the Legislature saved up billions of dollars to make up for declining revenue.
“We feel like we’re in a very strong position to be able to still meet our requirements and our commitments through the budget process because we had such a — what I consider an overpayment of tax money from the taxpayers,” he said.
Senate Democrats raised concerns about a five-year revenue projection that they obtained through a public records request to the Iowa Department of Management.
“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.”Sen. Janet Petersen, D-Des Moines
While the Reynolds administration expects revenue will start to increase again starting in Fiscal Year 2027, the document shows they also expect to draw money from the Taxpayer Relief Fund for at least the next five years, in amounts ranging from $200 million to $360 million per year.
“After weeks of delays, we finally got a peek at the Reynolds administration’s five-year projections, and the numbers are startling,” said Sen. Janet Petersen, D-Des Moines. “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.”
Grassley would not make a prediction about how many years the state would need to continue dipping into savings. But he said he was encouraged by the initial revenue estimate for Fiscal Year 2027, which is projected to be a 5.3% increase to just under $9 billion.
