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Iowa’s fiscal health debated as lawmakers prepare to set next year’s spending
Iowa is using well-stocked budget reserves to cover spending shortfalls created by recent reductions to Iowans’ income taxes
Jan. 5, 2026 5:30 am, Updated: Jan. 5, 2026 7:45 am
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DES MOINES — The fiscal health of the State of Iowa’s general fund budget is the subject of great debate at the State Capitol these days.
Republicans insist the state’s finances are in good health and everything is proceeding as they planned when they lowered Iowans’ state income taxes. Democrats are sounding alarms over the state spending more money than it is taking in.
Lawmakers will set state general fund spending for the next budget year, which begins July 1, during the 2026 session of the Iowa Legislature, which begins Jan. 12.
Legislative Preview Series
The Iowa Legislature begins its 2026 session Jan. 12. The Gazette will examine these state issues in the days leading up to the session:
Sunday: Property taxes
Today: State budget
Tuesday: Public safety
Wednesday: Eminent domain
Thursday: Agriculture/environment
Friday: Health care
Saturday: Abortion
Jan. 11: Higher education
Jan. 12: K-12 education
With that work looming and debate raging, the facts about the Iowa state general fund budget are these:
- Iowa is currently operating in a budget deficit, created in large part by a series of reductions in state income tax levels over recent years. The state’s general fund budget spending level, $9.4 billion in the current state budget year, is higher than state revenue for the same year — roughly $8.2 billion.
- Republican lawmakers anticipated state revenue would dip below spending levels when, starting in 2019, they enacted a series of tax cuts that reduced the taxes Iowa workers pay on their income — from nine rates as high as nearly 9 percent, to a single rate of 3.8 percent. Expecting a state revenue drop, Republicans planned to use unspent state tax revenue, stockpiled over multiple years in multiple accounts, to cover any budget shortfalls. Republicans have maintained throughout that eventually state revenues will rebound and surpass spending levels, eliminating the need for surplus funds to cover shortfalls.
- When state lawmakers during the upcoming legislative session set state spending levels for the next budget year, which starts July 1, they likely will again be spending more from the general fund than the projected revenue. The state is projected to collect roughly $8.5 billion in the 2026-2027 budget year, so lawmakers will have to reduce general fund spending by nearly $1 billion or again use the surplus funds to cover the shortfall.
- The two funding sources Republicans are using to cover the budget shortfalls — the state budget surplus and a Taxpayer Relief Fund — remain stocked even after two years of withdrawals. On Dec. 12, the state’s nonpartisan Legislative Services Agency projected in the 2026-2027 state budget year the state general fund surplus will be $546 million and the Taxpayer Relief Fund will contain $2.9 billion.
- The balances in those surplus funding sources, however, are declining. In March of 2024, LSA’s projections for the 2025 state budget year were a $3 billion general fund budget surplus plus $3.7 billion in the Taxpayer Relief Fund. In other words, the combined surplus in those two accounts in less than two years has dropped from $6.7 billion to $3.5 billion.
- Two other emergency state budget accounts remain filled to their statutory limit: there is a combined $850 million in the state’s Cash Reserve and Economic Emergency funds.
What Iowa statehouse leaders say
So, is the State of Iowa’s general fund budget in good shape while Iowans enjoy lower income taxes? Or is it careening toward a shortfall that eventually will require spending cuts to programs and services?
Let the partisan debate begin.
“It’s a structural deficit. I refer to it as a fiscal death spiral,” Rep. Brian Meyer, of Des Moines, who leads the minority-party Democrats in the Iowa House, said during an interview for The Gazette’s legislative preview series.
“Hopefully I’m wrong. Because I want the state to be successful,” Meyer said. “And I understand that (majority-party Republicans) are going to say, ‘Hey, we have these reserves.’ But the reality is that those reserves will last three or four years, and that’s assuming that things stay the way they are and don’t get worse. So it is a fiscal death spiral because of poor decisions that they have made in the last few years with regards to spending.”
Iowa House Speaker Pat Grassley, a Republican from New Hartford, pushed back at the assertion that statehouse Republicans have created a fiscally unsound state budget.
“When we made the decision to go to (a 3.8 percent state income tax rate), we did that knowing that we had an overcollection of taxpayer dollars,” Grassley said in an interview. “It’s very frustrating to me that we’re sitting in a position where somehow $7 billion of overpayment of taxpayer money is mismanagement. If it’s mismanagement, it’s because we have too much of it and it needs to get back in the hands of the taxpayers.
“So I feel very good about where we are within the budget. This was part of the plan, to have a reduction in revenue when you lower income taxes. … We feel like we put ourselves in a position that this is sustainable.”
Gov. Kim Reynolds declined to be interviewed for The Gazette’s legislative preview series.
What Iowa fiscal analysts say
The great state budget debate extends to two prominent Iowa-based think tanks. Mike Owen, of the progressive-leaning Common Good Iowa, and Ben Murrey, of the free enterprise- and limited government-leaning Common Sense Institute of Iowa, shared divergent views of the state’s finances during their discussion on a recent episode of “Iowa Press” on Iowa PBS.
Murrey disagreed with Owen’s characterization of Iowa’s state budget heading for a fiscal cliff.
“I’m concerned about this sort of thing. As a numbers guy, nothing drives me more crazy than seeing politicians (and) lawmakers not get their numbers right and spend more money than they have,” Murrey said. “They’re supposed to be stewards of the fiscal ship, so to speak, here in Iowa. …
“You have years and years of surpluses. In order to get that money back into the economy, you have to either spend it into the economy through government spending, or you have to return it to taxpayers. Those are your options. And (enacting tax cuts is) not a problem as long as you do it responsibly.”
Owen expressed doubt that state revenues will catch up to spending, and concern for what will happen to programs and services if that happens.
“We are past the point where we should be worried about this. This is an imminent threat to Iowa’s public services,” Owen said. “The tax cuts are permanent and the surpluses are one-time money. So when the surpluses go away, there’s nothing to fill in what’s happened with those tax cuts. And the tax cuts will inevitably — it’s just math — will threaten education, environmental quality, workplace safety, child care, you name it.”
What a national state budget analyst says
Iowa’s financial picture received a “B” grade from Truth in Accounting, a national nonprofit that publishes an annual report card of states’ fiscal health.
Iowa was one of 20 states in Truth in Accounting’s “Financial State of the States 2025” report to receive a “B” grade for having a state budget surplus between $1 and $9,999 per taxpayer. Iowa has a per-taxpayer budget surplus of $9,800, according to the report, which was published in September.
Five states in the report had “A” grades for per-taxpayer budget surpluses exceeding $10,000 per taxpayer, while 25 states were graded “C” through “F” for having a “taxpayer burden,” meaning the states did not have enough money available to pay all the state’s bills, according to the group’s report.
The report portrays a healthy picture of Iowa’s finances with a potential warning for the near future.
“Iowa has received substantial temporary federal aid since 2020 in response to the COVID-19 crisis. This additional funding contributed to improvements in the state’s financial condition and increased its money available to pay bills,” the report says. “However, as this aid diminishes and national budget tightening continues, future funding may return to more typical levels. … This may present challenges for maintaining services and balancing the budget.”
Comments: (515) 355-1300, erin.murphy@thegazette.com
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