This month, Iowa’s Revenue Estimating Conference reported that state revenue is expected to drop significantly in the coming years. In fiscal year 2025, revenue will fall by $602 million (6.2%), and in fiscal year 2026, it’s projected to drop another $428 million (4.7%).
Republicans link this decline to the 3.8% flat income tax rate set to take effect next year. They’ve pushed for reducing state income taxes, with some even advocating for eliminating them entirely.
Despite this, Iowa has a large budget surplus: $2 billion, $961 million in reserve accounts, and $3.75 billion in the Taxpayer Relief Fund — totaling about $6.75 billion. A fair question is: why is this money being held back?
The Risks of Cutting Taxes During Uncertain Times
Republicans passed the flat tax during a highly unusual economic period. During the COVID-19 pandemic, the federal government injected $5.2 trillion into the economy, temporarily boosting state revenues and reducing expenses. However, experts, like the Pew Charitable Trusts, warn that many states are now at risk of financial trouble because temporary pandemic funds have dried up, while new spending commitments and tax cuts remain.
Instead of waiting to see how the economy would stabilize post-pandemic, Republicans rushed to pass the flat tax, even though it was unclear how future tax revenues would shape up. As the pandemic’s financial boost fades, states, including Iowa, are now seeing significant drops in tax revenue. By the end of 2023, Iowa’s revenue had already fallen 6% below historical trends, one of the largest declines in the nation.
Locking in a Flat Tax for the Future
Iowa Republicans want to make this tax cut permanent by amending the state constitution. Last year, they passed a proposal requiring a two-thirds legislative vote to raise individual or corporate income tax rates. If passed again this session, the amendment will appear on the November 2026 ballot. Critics argue this could lock future generations into tax policies created during a temporary economic high.
To cover the expected budget gaps caused by the flat tax, Republicans and Governor Kim Reynolds made changes to how the Taxpayer Relief Fund can be used. A new law allows money from this fund to fill revenue shortfalls, essentially masking the negative impacts of the tax cut until after voters decide on the constitutional amendment.
Misusing the Taxpayer Relief Fund
Critics say the Taxpayer Relief Fund is no longer serving its intended purpose of giving money back to taxpayers. Instead, it’s being used to patch up budget gaps caused by tax cuts. This strategy has been likened to a “shell game,” shifting money around without truly addressing the underlying financial issues. Instead of directly refunding taxpayers, these funds are being used to keep the state afloat.
The Bigger Picture
While Republicans focus on shrinking government, critics argue that the government’s “size” should match its responsibilities. Essential services like disaster response, infrastructure maintenance, pension funding, environmental cleanup, and adequately supporting public schools should take priority. Cutting taxes without ensuring the government can meet these basic needs may lead to bigger problems down the road.