Income tax cuts are not the problem; uncontrolled spending is. It’s hardest to control spending when accounts are full, which is exactly when restraint and conservative budgeting matter most.
The legislature has passed a $9.4 billion Fiscal Year 2026 budget, which is 5.7 percent over the previous budget. This continues a two-year increase in state spending above recent baseline trends that should alarm legislators. A leading cause of the increase is due to two significant budget line items, which include an increase in the state cost of Medicaid and Education Savings Accounts (ESAs). However, this spending trend cannot continue.
The Revenue Estimating Conference (REC) projected that Iowa would collect $8.5 billion in net revenue receipts in Fiscal Year 2026, which means that the legislature was required to utilize a portion of the budget surplus and $464 million from the Taxpayer Relief Fund. Altogether, $917 million in reserve funds were used to support the budget.
Governor Reynolds and Republican legislative leaders described the Fiscal Year 2026 budget as a “responsible, balanced budget that puts taxpayers first and keeps Iowa on a strong, fiscally sustainable path.”
Critics argue that the legislature is engaging in deficit spending.
In response, Governor Reynolds argues: “Let’s be clear: this isn’t a deficit—it’s the result of the state collecting more from taxpayers than it needed. Now we’re giving it back. That’s what the Taxpayer Relief Fund is for. With $3.75 billion set aside specifically to offset income tax reductions, the fund ensures that we can cut taxes today while maintaining essential services and long-term stability.”
The question is, “who is correct?
First, let’s stick to the facts by taking a look at TRF. The legislature established the Taxpayers Trust Fund, which is now the Taxpayer Relief Fund (TRF), to address the overcollection of income taxes.
When actual net revenue receipts come in above the REC projections this increases the ending balance and creates a surplus that may be used for increased spending. Big spenders win, but taxpayers lose under this scenario.
This motivated the legislature to establish the TRF for a place to collect a portion of the overcollection of tax dollars to send back to the taxpayers. Over time the dollars in the TRF continued to grow, which has given the Governor and the legislature a meaningful avenue to cut taxes.
When net receipts are reduced due to income tax rate reductions, monies are to be transferred to General Fund to cover that reduction. The TRF is not to be used as a slush fund for increased spending or even “buying” down property taxes. Governor Reynolds is correct because the TRF is working as intended.
This year the 3.8 percent flat tax was fully implemented, which was reason revenue was lower. Even with using $464 million to support the budget; the TRF is still projected to have a $3.6 billion balance. The reserve or “rainy day” funds will also continue to be full at their maximum at $849 million and budget surpluses are projected for both Fiscal Years 2025 and 2026.
There are warnings that should concern policymakers. The legislature did appropriate over $25 million from the Sports Wagering Fund to pay for a variety of programs. The problem with this is that these are one-time funds and in the future these appropriations will have to be shifted over to the General Fund.
Another concern that legislators need to be worried about is possible changes coming from both the federal government and the national economy. Iowa relies on federal funding, especially for high-cost programs such as Medicaid. What happens when the federal government pulls back on some federal funds? Or federal polices such as the future “Big Beautiful” tax and spending bill will have a direct impact on Iowa.
Finally, the income tax cuts are being blamed for causing a budget “crisis.” Iowa is not in a budget crisis, and if a budget crisis were to occur it would only be the result of overspending. Legislators only need to look at Minnesota.
Governor Tim Walz and the legislature not only raised taxes, but spent an entire $18 billion budget surplus, and now the state is confronted with a $6 billion deficit. The common denominator for states facing a budget crisis is that they all have increased spending and taxes. States cannot tax and spend their way to prosperity.
The income tax cuts are not a problem. Uncontrolled spending causes a budget crisis. It is most difficult to control spending when the accounts are full, this is when restraint and conservative budgeting are most important. Governor Reynolds and the Republican legislature are keeping Iowa’s fiscal house in order, and going forward conservative budgeting must be top priority.
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