As revenue aligns more closely with expenses, future tax cuts will require careful spending control. By reclaiming federalism and exercising greater oversight over federal funds, Iowa can create the budget flexibility needed to sustain tax relief.
Iowa has made great strides in tax reform, but now that the income tax rate has been right-sized, the era of massive budget surpluses is likely over. Future tax cuts will require a disciplined approach to budgeting. One key strategy is reclaiming federalism by reducing Iowa’s reliance on federal funds, which often come with costly mandates and allow for little state control or input. This approach would make it easier for the state to identify savings and slow the growth of numerous programs.
The Hidden Costs of “Free” Federal Money
While federal funding may seem like an easy way to finance state programs, it rarely comes without strings attached. These grants often require Iowa to contribute matching funds or follow federal regulations that impose additional costs. For example, one of my earliest tough votes as a state legislator involved lowering the legal blood alcohol limit from 0.10% to 0.08%. The push for this change was largely driven by the promise of federal money for Iowa’s road use tax fund. But with that funding came federal mandates, leaving lawmakers caught between advocacy groups on both sides of the issue.
Or I think about a colleague serving during his first term in office. This freshman legislator was assigned to the appropriations committee and was eager to take a proverbial red pen to the state’s budget. However, after working with our talented legislative staff, he became completely disheartened. He was told—whether correctly or not—that nearly every item he had identified was tied to federal dollars, making potential cuts off-limits. The freshman legislator’s experience reminded me of a similar experience I had when looking at the Department of Natural Resources Budget. While not all federal dollars are bad, legislators need to know exactly what the long-term costs really are for Iowa taxpayers in relationship to the expected benefits.
Accepting federal money frequently forces the state into long-term financial commitments. Without proper oversight, lawmakers may not fully grasp how much money the state must spend to comply with federal funding requirements. This lack of transparency can lead to unnecessary expenditures that strain the budget.
Reclaiming Federalism to Control Spending
To make future tax cuts possible, Iowa must rethink its reliance on federal funding. The first step is to inventory all federal funds coming into the state and identify their associated costs. Once lawmakers have a clearer picture, they can determine which programs are truly beneficial and which ones should be declined to reduce spending.
Another key reform is increasing transparency by requiring state agencies to disclose all federal guidance to the legislature. Federal agencies often issue guidance through memos or “Dear Colleague” letters that interpret existing regulations without undergoing formal rulemaking. These directives can impose costly requirements on states, forcing compliance to avoid losing federal funding. Tennessee has addressed this issue by requiring federal guidance be disclosed to the legislature, ensuring lawmakers can push back against overreach. Iowa should consider a similar approach.
A Path to Sustainable Tax Reform
Iowa has successfully implemented multiple rounds of income tax cuts, with continued interest in further reductions—even eliminating the state income tax altogether. However, as revenue aligns more closely with expenses, future tax cuts will require careful spending control.
By reclaiming federalism and exercising greater oversight over federal funds, Iowa can create the budget flexibility needed to sustain tax relief. Limiting reliance on federal dollars allows the state to prioritize its own financial health, ensuring tax policy decisions serve Iowans—not Washington, D.C.
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