Tax cuts expected to reduce state revenues $600 million this year

Despite unanimous views of a strong economy in Iowa and a strengthening one nationally, members of the Iowa Revenue Estimating Conference on Thursday estimated state revenues will drop about $600 million this fiscal year compared to last year.

Kraig Paulsen, state budget director and chairman of the REC, said the state tax cuts enacted over the past several years are driving the projections for the coming year, as well as anticipated federal tax changes under President-elect Trump for the following year.

“The reductions are absolutely being driven from the tax cuts,” he told reporters after the meeting.

“The REC projections are what we expected due to our responsible, growth-oriented fiscal stewardship,” Gov. Kim Reynolds said in a statement.  ” … Iowa’s conservative budgeting practices and commitment to shrinking the size and scope of government have once again put our state in a strong financial position just as our low, flat income tax rate of 3.8% takes effect next year for every Iowa taxpayer.”

By law, Iowa lawmakers can only spend 99% of estimated revenues set during the Revenue Estimating Conference’s December meeting.  That means lawmakers will have nearly $8.64 billion to spend from the state’s general fund when they return next month for the 2025 session. The 2025 fiscal year budget approved in the 2024 session was just over $8.9 billion.

Democrats raise concerns about revenue reductions

Legislative Democrats raised concerns about reduced revenues given an anticipated rise in spending on private schools.

“Iowa’s revenues are still declining,” Sen. Janet Petersen, D-Des Moines, said. “With the floodgates set to open on the Republicans’ private school voucher program, it’s more important than ever that Iowans are able to see where their money is being spent, especially as most Iowans aren’t feeling any positive effects from the Republican majority’s budgeting priorities.”

All students attending nonpublic schools will be eligible for Iowa’s Education Savings Account program during the next school year, with no income eligibility limits and an unlimited standing appropriation. The cost has been estimated by nonpartisan legislative staff at more than $300 million a year starting next school year.

Paulsen: No need for budget cuts

Paulsen said he does not anticipate a need for budget cuts for the fiscal 2025 budget, which lawmakers approved last spring.  He said the state’s reserve funds are full at $961 million, the Taxpayer Relief fund has a balance of over $3.75 billion and the ending balance from the previous year was $1.9 billion.

“The spending discipline shown by the governor and the General Assembly have served Iowa well,” he said.

The state’s individual income tax will fall from a top rate of 5.7% to a flat rate of 3.8% in 2025, and top corporate taxes are gradually reducing from 7.1% to a flat rate of 5.5% each year that Iowa has more than $700 million in corporate tax revenues. The estimate adopted by the REC expects $712 million in corporate income taxes in fiscal 2025, a 20% drop from the previous year.

The three-member panel estimated that the state will have about $9.15 billion in tax receipts in the fiscal year that began July 1, 2024.  That’s a 6.2% drop compared to the previous fiscal year. The panel’s October estimate had projected a 5.3% reduction.

The panel projected a slightly smaller decrease of $428 million, or 4.7%, for the fiscal year that begins July 1, 2025.

Reynolds has promised “the best is yet to come” in terms of tax cuts for Iowans, but has offered few specifics. Republican legislative leaders, in a recent discussion with business leaders, emphasized proposals to cut property taxes, which are primarily a revenue source for cities, counties and schools.

Paulsen said he expects there will be opportunities for tax cuts in the upcoming session, but added he wants to see the impact of federal tax changes over time.  Trump’s proposal to eliminate income taxes on tips, for example, “would have a meaningful impact” and “may limit some options,” Paulsen said.