“Ag is king in South Dakota. When ag does well, the state does well. But when ag struggles, our growth tends to slow down. It’s a tough time to be a crop farmer – and not just in South Dakota,” noted Governor Larry Rhoden. He added that “corn, wheat, and soybean prices are off their high points from a couple years ago. On the other hand, beef prices are at record highs, but that alone has not been enough for ag to keep pace overall.”
In response to the challenging economic picture, Governor Rhoden proposed a “holding pattern” budget for Fiscal Year 2027, with only a slight increase from his state’s current budget. Rhoden was blunt in his assessment, “There’s been a lot of speculation on the economy. I won’t sugarcoat it: revenues have been pretty flat – only rising slightly,”
Ag is king in the Hawkeye State, too, meaning Iowa joins South Dakota in this environment of economic uncertainty. Iowa’s agricultural economy has been in a slump for the past few years, impacting not only farmers but also manufacturers, leading to substantial layoffs and even closures. This downturn has directly reduced Iowa’s individual and corporate income tax receipts and has negatively affected sales and use tax revenue.
It’s also worth noting that while Iowa has been facing economic headwinds, the state’s economy is in a much better position than the federal government initially suggested. After a recent revision of data from the U.S. Bureau of Economic Analysis, Iowa’s GDP was correctly ranked 27th (not 49th, as initially reported) in the first quarter of 2025. Following 3.7% GDP growth in the second quarter of 2025, Iowa ranked 18th at the year’s midpoint. This follows 2024, when Iowa’s GDP grew at an annual rate of 2.5%.
All of this means that while Iowa is holding its own during a difficult time for agriculture, lawmakers should follow South Dakota’s example and remain in a “holding pattern” with the next budget. That will require restraining spending growth.
A key step in that budgeting process is the December meeting of the Revenue Estimating Conference (REC). The most recent REC meeting, held on December 11, set the stage for planning the Fiscal Year 2027 General Fund budget. Despite national economic uncertainty and continued weakness in the agricultural sector, the REC still increased its revenue estimate slightly.
The Iowa Legislature will convene on January 12, 2026, and Governor Kim Reynolds will deliver her final Condition of the State Address the following day, outlining her priorities and plans for the Fiscal Year 2027 budget.
Iowa’s revenue landscape had already been shifting due to taxpayer savings from the 3.8% flat tax, which was fully implemented for the first time in 2025. However, the agricultural downturn, national economic uncertainty, and federal policy changes—most notably from President Donald Trump’s “One Big Beautiful Bill Act”—are placing additional pressure on Iowa’s revenue.
Fortunately, Governor Reynolds understands the importance of conservative budgeting. The Cato Institute has twice named her the most fiscally conservative governor in the nation for her prudent budgeting and pro-growth tax reforms. She also launched the first major reform of state government in nearly 40 years.
At its October meeting, the REC estimated Fiscal Year 2026 revenue at $8.134.1 billion and then upped that estimate to $8.157.5 billion in December, due in part to better-than-expected growth in sales and use tax revenues. The December estimate for Fiscal Year 2027 also shows signs of optimism, projecting revenue of $8.498.5 billion—a 4.2% increase from the current Fiscal Year 2026.
“The State of Iowa ended Fiscal Year 2025 with a $1.9 billion ending balance and reserve funds full. As of this year, Iowans are pocketing more of their hard-earned money by paying a low 3.8% flat tax on their income. This has resulted in less tax revenue, just as we anticipated and prepared for by building the state’s Taxpayer Relief Fund to more than $4 billion,” stated Governor Reynolds, after the December REC projections were released.
The state’s reserve, or “Rainy Day,” funds—which include the Cash Reserve Fund and the Economic Emergency Fund—remain filled to their statutory maximums: $929.9 million for Fiscal Year 2025 and $849.2 million for Fiscal Year 2026.
As lawmakers enter the 2026 session, Iowa will need to navigate a national environment marked by economic uncertainty, soft agricultural markets, and shifting federal policy. Yet there are signs of cautious optimism: certain commodity prices are beginning to rebound, China has slowly resumed soybean purchases, and consumer spending appears more resilient than expected. President Donald Trump’s “One Big Beautiful Bill” is also expected to provide additional economic stimulus, helping support growth as Iowa moves into Fiscal Year 2027. The December REC projections reflect this mixed but improving outlook—offering encouragement, but also underscoring the need for careful budgeting.
Maintaining Iowa’s strong fiscal foundation will require the same discipline that produced the state’s historic tax reforms, including the fully implemented 3.8% flat tax that now allows taxpayers to keep more of their earnings. Conservative budgeting has positioned Iowa well, even in the face of agricultural and national headwinds, and it must remain the guiding principle for the Fiscal Year 2027 budget. Neighboring states such as Minnesota and Illinois illustrate the risks of letting spending outpace revenues: higher taxes, weaker budgets, and diminished economic competitiveness. Iowa cannot and should not follow that path. By holding the line on spending and prioritizing long-term stability, policymakers can ensure the state remains on a strong and sustainable fiscal trajectory.
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