Iowa’s revenue projection dips slightly as lawmakers prepare new state budget

DES MOINES — There is unease in Iowa’s economy generated by uncertainty in the federal administration and a weakening agricultural sector, and yet the state government’s fiscal health remains solid, according to the state’s nonpartisan revenue estimating panel that met Thursday.

Iowa’s Revenue Estimating Conference, which met for its regular quarterly meeting to project state revenue in the next three state budget years, lowered its estimate for the fiscal year that begins July 1. The panel now projects the state will collect $8.5 billion in revenue — down by nearly $218 million from its projections in December.

The three-member panel is comprised of representatives from the state’s nonpartisan Legislative Services Agency, the governor’s administration and an expert from the public.

Iowa Department of Management Director Kraig Paulsen, the administration’s representative on the panel and a former Republican Iowa House speaker, said that reduction from the previous estimate was driven largely by Iowans’ tax withholding being stronger than expected and tax refunds being higher than expected.

That $8.5 billion in projected revenue remains lower than the current state spending of roughly $8.9 billion for the current budget year. That means when state lawmakers and Gov. Kim Reynolds craft the next state budget over the coming weeks, they will need to reduce state spending or use a tax relief fund and a state budget surplus — or a combination of the approaches.

Reynolds’ budget proposal, which she published in January, calls for a $9.4 billion state budget that would tap into the state’s $2 billion budget surplus and the Taxpayer Relief Fund, which has $4 billion.

Republicans who have agenda-setting majorities in both chambers of the Iowa Legislature, have not yet set spending targets for the coming budget year.

In addition to Paulsen, the panel is comprised of Jennifer Acton of the legislative agency and Jeff Plagge, a former banking chief executive officer and former superintendent of the Iowa Division of Banking.

What the panel said

Acton said Iowa’s economy has proved resilient but also shows signs of slowing. She said there is evidence that consumers are growing weary of high inflation and high interest rates, and that there is “a lot” of economic uncertainty in the Iowa and nationwide.

Acton also said Iowa’s agricultural and manufacturing sectors are showing signs of weakening, with farmers already facing high input costs and concerns over potential disruptions in international trade.

President Donald Trump has levied or threatened tariffs on multiple key U.S. trading partners, including Canada, Mexico and China.

Acton said the effect of tariffs on agriculture, manufacturing and crop prices, plus the fluctuations in interest rates and volatility in the stock market, are headwinds to watch. However, for now, Iowa remains in “a strong financial position,” she said.

Paulsen said the projected dip in state revenue long has been expected with the enactment of Republican-approved reductions to Iowa’s personal income tax rates. The expectation is that state revenue will grow and eventually outpace spending, he said, and until then the shortfalls will be covered by the Taxpayer Relief Fund, which was established by statehouse Republicans for that purpose.

Statehouse Republicans gradually have reduced Iowans’ state income taxes over multiple years with a series of bills, the last of which created a single 3.8 percent state income tax on most workers that went into effect this tax year.

“There are no surprises today,” Paulsen said during Thursday’s meeting. “Between the tax cuts enacted and 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 (state lawmakers) — continue to put the state in a position where the needs of Iowans can be met and we can weather through this tighter time.”

What Statehouse leaders say

Like Paulsen, current House Speaker Pat Grassley, a Republican from New Hartford, said the revenue dip was expected when Republicans passed the state income tax cuts, and that is why they also created the Taxpayer Relief Fund.

“We were very transparent about it. There’s a reason we built up a significant, nearly $4 billion within the Taxpayer Relief Fund. We also left ourselves the $2 billion roughly in the (state budget’s) ending balance, knowing that as you’re reducing taxes, you could see some short-term loss of revenue,” Grassley told reporters Thursday. “We made all those decisions with that in mind. So 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.”

Democrats criticized majority Republicans for using the reserve funds to support state spending. They said the move equates to using one-time funding sources for ongoing expenses — a budget practice that Republicans typically have decried.

“Today’s state financial estimates confirm an impending budget crisis created by Republicans,” Rep. Timi Brown-Powers, a Democrat from Waterloo and the top Democrat on the House’s budget committee, said in a statement. Republicans “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.”

Sen. Janet Petersen, a Democrat from Des Moines and the top Democrat on the Iowa Senate’s budget committee, highlighted projections from the administration that show the state using the Taxpayer Relief Fund to support the state budget for the next five fiscal years.

“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,” Petersen said in a statement. “Republicans are breaking their own rule of using one-time funds for ongoing expenses, and Iowa taxpayers are footing the bill.”

The administration’s projections, even after using the Taxpayer Relief Fund for five years, show the fund with a balance of nearly $3 billion at the end of the period, plus nearly $1 billion in the state’s Cash Reserve Fund.

Reynolds noted those healthy reserve fund accounts in a statement she issued Thursday.

“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. “… 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.”

Majority Republican lawmakers also have proposed legislation designed to limit the growth of Iowans’ local property taxes. While most property taxes fund school, city and county budgets, the proposal also calls for state general fund dollars to provide $426 million in school funding currently paid for with property taxes.

The bill has not yet been scheduled for its first legislative hearing.

Comments: (515) 355-1300, erin.murphy@thegazette.com

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