This month, the state Revenue Estimating Conference reported new estimates showing Iowa revenue will drop by $602 million (6.2%) compared with fiscal year 2024. Further, state revenue is expected to drop by a further $428 million (4.7%) in fiscal year 2026, which begins July 1, 2025. Republicans attribute the fall in estimated revenue to the start of their 3.8% flat income tax rate next year. Republicans have promoted reducing the state income tax — which Sen. Jack Whitver derisively calls a “confiscation” — down to zero.
But Republicans have amassed a $2 billion budget surplus, $961 million in its reserve accounts, and $3.75 billion in the Taxpayer Relief Fund, which was supposed to be used to reduce taxes. All told, about $6.75 billion. One good question is: Why?
Republicans enacted a long-term commitment to reduced revenues due to the flax tax at an extremely volatile time during and after the COVID-19 epidemic. The federal government’s $5.2 trillion infusion into states and their economies was the largest fiscal stimulus package ever. One-time federal financial supports reduced state costs and artificially bolstered revenues. Recently, Pew Charitable Trusts observed : “The combination of temporary funds propping up budgets and the adoption of new recurring expenditures or tax cuts has left many states in a precarious position. Policymakers now must grapple with the possibility that their states’ finances are structurally imbalanced and vulnerable to deficits as one-time funds dry up but new commitments remain.”