Budgeting restraint is the foundation for fiscal stability and the main pillar of conservative fiscal policy. As a result of high inflation, a downturn in the agricultural economy, and the continual national economic uncertainty, Iowa’s revenue growth has been challenged. Further stress is being placed on revenue by recent federal policy changes, especially the reforms initiated under President Donald Trump’s One Big Beautiful Bill Act, which renewed most aspects of his 2017 tax bill, in addition to implementing new cuts as well. Iowa’s revenue growth has also been lower as multiple rounds of state-level tax cuts have been phased in, delivering on the goal of allowing Iowa families and businesses to keep more of their own incomes.
Acknowledging all of the dynamics impacting Iowa’s revenue, Governor Kim Reynolds made it a priority to limit spending in the Fiscal Year 2027 budget that was just passed. Her goal was to restrain the budget to no more than a 2% increase from the previous fiscal year. In the past, conservative budgeting has been a stated priority for Iowa lawmakers, and that discipline helped make historic income tax reform possible. However, spending growth has accelerated in the most recent budget cycles. The Fiscal Year 2026 budget, for instance, totals roughly $9.4 billion—an increase of more than 5 percent over the previous year ($8.9 billion FY 2025).
Given the revenue forecasts and the current economic situation, the legislature agreed with Governor Reynolds about the need to limit spending. For Fiscal Year 2027, the legislature approved a $9.6 billion General Fund budget, which is a 1.4% increase over the previous year. To close the roughly $1 billion gap between revenue and expenses, the legislature will utilize $617.8 million from the Taxpayer Relief Fund with the remainder coming from the ending balance surplus.
The Fiscal Year 2027 budget continues to demonstrate accelerated growth in both public education and Health and Human Services spending, primarily driven by the Medicaid program. Combined, public education and Health and Human Services funding account for nearly 84% of the General Fund budget, totaling $8.1 billion. Public education alone consumes $5.4 billion, or nearly 56% of the budget. The majority of that appropriation—more than $4 billion, which is technically in the Unassigned Standings category—is directed toward state aid for K-12 per-pupil spending.
Funding for Education Savings Accounts received a $21 million increase from 2026 to 2027. Overall, the cost of ESAs increased from $218 million in Fiscal Year 2025, to $328 million in Fiscal Year 2026, and now $350 million in Fiscal Year 2027. The legislature also appropriated an additional $1.3 million for charter schools in the Fiscal Year 2027 budget.
Total Health and Human Services funding is $2.7 billion. The majority of this is directed toward Medicaid. Altogether Health and Human Services consumes 28% of the budget. Medicaid is one of the fastest growing government programs, and this session the legislature had to fill a $90 million funding gap for Fiscal Year 2026. In addition, a $170 million shortfall is estimated for Fiscal Year 2027.
Several lessons can be discerned from the Fiscal Year 2027 budget. First, education and Medicaid will continue to increase in cost. In February, Fitch Ratings affirmed Iowa’s “AAA” rating, but it also warned about the growth in these two areas. Fitch’s report stated “that the natural pace of spending growth, largely driven by education and Medicaid funding needs, will be somewhat ahead of the state’s policy-adjusted revenue growth rate, requiring ongoing budget management.”
Without reform, these programs will continue to crowd out other budget priorities. The fight for an already small portion of the budget is becoming more competitive among the remaining sectors of state government.
Second, although the legislature must utilize the funds from the Taxpayer Relief Fund and the ending balance surplus to cover the budget shortfall, Iowa’s fiscal foundation remains secure. Currently, the ending balance surplus for Fiscal Year 2026 is $1.5 billion and a $870 million surplus is projected to remain on hand for Fiscal Year 2027.
Both the Cash Reserve and Economic Emergency Funds remain full at their statutory levels. The combined balance will be $849.2 million in Fiscal Year 2026, and $840.5 million for Fiscal Year 2027. The Taxpayer Relief Fund, which had a $4 billion balance in Fiscal Year 2025, will have a $3.1 billion balance for Fiscal Year 2026, and it is estimated to have a $2.6 billion balance for Fiscal Year 2027.
Finally, the budget is a reminder that federal policy has a direct impact on Iowa’s revenue. That impact can occur through federal policy changes such as the One Big Beautiful Bill Act or the consequences of national economic headwinds. This all can have a positive or negative impact on revenue. There is expectation that the slate of federal tax cuts will have a pro-growth impact on the economy, which will help increase revenue in Iowa.
Iowa was only able to build up strong reserves and the sizable Taxpayer Relief Fund because of conservative budgeting practices. While the Taxpayer Relief Fund was intended to help close budget gaps created by income tax reductions, it was never meant to serve as a backstop for unchecked spending increases. Without spending discipline, the fund effectively shifts from supporting tax relief to subsidizing higher levels of government spending. The Taxpayer Relief Fund needs to be protected so it can continue serving its intended purpose: supporting additional reductions to Iowa’s current 3.8% flat tax rate. If spending growth remains restrained while revenues and expenditures realign, the fund can help make future tax relief possible rather than simply sustaining higher levels of government spending.
Governor Reynolds and the legislature were correct to limit spending growth in the Fiscal Year 2027 budget. That approach reflects the kind of disciplined budgeting that allowed Iowa to lower income tax rates, build strong reserves, and maintain long-term fiscal stability. Going forward, continued spending restraint will be essential not only to protect Iowa’s strong fiscal foundation, but also to preserve the Taxpayer Relief Fund for its intended purpose: making future tax relief possible for Iowa taxpayers.
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