Iowa’s disciplined fiscal policies are paying off. While some states face budget crises, Iowa continues to thrive.
Governor Kim Reynolds recently delivered her Condition of the State Address, outlining her legislative priorities and emphasizing Iowa’s fiscal strength, achieved through conservative policies. “I can say, once again, that the condition of our state is strong,” she stated. This strength is especially evident in Iowa’s fiscal foundation, as the state ranks as the most fiscally conservative in the nation. This success reflects the conservative budget and tax policies enacted by Governor Reynolds and the legislature.
Governor Reynolds highlighted significant tax reforms as a key achievement: “We reduced taxes—saving Iowans more than $24 billion over 10 years. No more tax on retirement income. No inheritance tax. And starting this month, Iowans get to keep even more of the money they earn, with a 3.8% flat tax—a far cry from the 8.98% of six years ago.” Iowa’s corporate tax rate, once the highest in the nation at 12%, has been reduced to 7.1% and will continue to decrease until it reaches a flat 5.5%.
These reforms are grounded in conservative budgeting, which has prioritized spending control and implemented government efficiency measures championed by Governor Reynolds. These efforts have not only ensured budget stability but also enabled responsible tax reductions. “We’ve transformed the way our State interacts with citizens, businesses, and entrepreneurs,” Reynolds explained. “We consolidated agencies, eliminated 1,200 burdensome regulations, remade legacy systems, centralized programs, and leveraged technology.” These reforms have already saved taxpayers $217 million, exceeding original projections.
Budget Proposals and Revenue Outlook
Governor Reynolds’ proposed $9.4 billion Fiscal Year (FY) 2026 budget reflects a $486 million (5.4%) increase over the $8.9 billion FY 2025 budget. The largest program areas remain Medicaid and education. According to the December Revenue Estimating Conference (REC), Iowa’s revenues are projected at $9.1 billion for FY 2025 and $8.7 billion for FY 2026. The anticipated revenue decline is due to the transition to the 3.8% flat tax.
Critics argue that the proposed budget, which requires using approximately $700 million from prior surpluses and the Taxpayer Relief Fund, indicates a budget deficit. Some speculate—as a scare tactic—that this could prompt discussions on finding new revenue sources. These claims echo past warnings of a “fiscal Armageddon,” yet Iowa’s fiscal foundation remains robust.
Since 2018, Iowa’s budget has consistently recorded surpluses. For FY 2025, the state will have $7 billion in unspent tax money across reserve funds, the Taxpayer Relief Fund, and the General Fund ending balance. The state’s cumulative surplus is projected to remain strong, expected to be $2.1 billion at the end FY 2025 and $1.9 billion at the end of FY 2026. The Taxpayer Relief Fund is expected to reach $3.9 billion by FY 2025, while the Cash Reserve and Economic Emergency Funds remain fully funded.
Critics incorrectly attribute these surpluses to federal stimulus dollars. In reality, Governor Reynolds and the legislature avoided using short-term federal funds for ongoing General Fund programs. Surpluses stem from prudent budgeting, including limiting spending to less than 99% of projected revenue. Additionally, the 2018 tax reforms, which lowered income tax rates and expanded the sales tax base, boosted Iowa’s economy. Governor Reynolds’ decision to keep the economy open during the pandemic further contributed to the state’s economic resilience.
Responsible Use of the Taxpayer Relief Fund
The Taxpayer Relief Fund was created specifically to provide income tax relief. Utilizing it to cushion the budget during the transition to lower tax rates aligns with its purpose. Iowa taxpayers will benefit from the 3.8% flat tax, and drawing on the fund for this purpose is both expected and appropriate. Critically, these funds are not being used for unrelated expenditures.
Despite lower tax rates and declining revenue, Iowa has sufficient funds to meet its financial obligations. Tax cuts have been financed by existing budget surpluses, resulting from the overcollection of income and sales taxes, rather than reductions in government services. While spending growth has been restrained, overall spending has still doubled since 2003, increasing from $4.47 billion to the current budget. Annualized spending growth has averaged just over 3% during this period.
Economic Impact of Tax Reductions
Lowering tax rates may temporarily reduce revenue, but these funds are not “lost.” The money belongs to taxpayers, not the government. Keeping more income in the hands of individuals and businesses allows for greater investment, job creation, and economic growth, ultimately expanding the tax base. States with low or no income taxes often experience greater economic prosperity and fiscal stability, as demonstrated by many fast-growing states.
In contrast, states with high taxes and spending often face fiscal crises. For example, Minnesota, under Governor Tim Walz, has exhausted an $18 billion surplus and raised taxes and fees by $10 billion, leading to a projected $5.1 billion budget deficit. Since 2019, government spending per person in Minnesota has increased by 23%. This pattern underscores the consequences of reckless tax-and-spend policies.
Maintaining Fiscal Discipline
As Iowa enters uncharted territory with further tax rate reductions, legislators must uphold conservative fiscal policies. Governor Reynolds has proposed additional government efficiency measures, including the creation of an Iowa Department of Government Efficiency (DOGE). This task force aims to identify savings and streamline operations at both state and local levels. Other tools to control spending include strengthening the 99% spending limitation and adopting performance-based budgeting.
Moving forward, policymakers should adhere to principles of fiscal responsibility, such as limiting spending to a conservative projection of revenues and using the Taxpayer Relief Fund only to support tax rate reductions. By maintaining prudent budgeting practices, Iowa can ensure continued economic growth and fiscal stability.
The Verdict
Governor Reynolds’ leadership has established Iowa’s fiscal foundation as one of the strongest in the nation. Conservative budgeting has allowed Iowans to retain more of their income while making the state more competitive. At the same time, efforts to increase government efficiency have ensured that these policies are sustainable. Iowa’s fiscal policies are both responsible and effective, providing a model for other states to follow.
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