In recent years, Iowa has been known for its fiscal prudence. But that may be slipping.
According to a March 2025 Fitch Ratings report, “the state of Iowa’s ‘AAA’ Long-Term IDR and Stable Outlook reflect Iowa’s stable economic and employment trends and solid near-term revenue growth prospects. The rating also reflects the state’s historically well-managed budget and fiscal operations and low debt and net pension liability burdens. In the near term, the state anticipates relying on an unusually high ending balance and the Taxpayer Relief Fund to transition to a lower revenue baseline while maintaining dedicated operating reserves.”
This financial discipline can give Iowa a competitive advantage.
While we appreciate the continued efforts to lower tax rates for businesses, we are concerned that the Iowa Legislature recently approved a state budget for FY2025 that includes spending from reserves to cover a projected shortfall, which is basically deficit spending.
Deficit spending or tapping the Taxpayer Relief Fund should only be implemented when there are economic calamities or natural disasters.
According to the latest projection from the state’s nonpartisan Revenue Estimating Conference, the state will collect an estimated $8.5 billion in the next budget year. That means lawmakers will have to use Iowa’s various surpluses and reserve funds to cover an estimated $917 million budget shortfall. That’s something majority Republicans foresaw when they passed state income tax cuts, according to a Gazette news article.
There is a $2 billion surplus in the general fund and $4 billion in the Taxpayer Relief Fund, which was created to cover revenue shortfalls caused by the income tax cuts.
Republicans, who control agenda-setting supermajorities in the Iowa Legislature, have argued that eventually state revenues will grow faster than state spending levels as tax cuts increase Iowans’ disposable income – leading to more consumer spending and economic growth, according to the same article.
Iowa Governor Kim Reynolds said in a statement the budget maintains fiscal discipline and looks out for Iowa taxpayers.
“To keep taxes low and ensure Iowans keep more of what they earn, we passed a responsible, balanced budget that puts taxpayers first and keeps Iowa on a strong, fiscally sustainable path,” Ms. Reynolds said. “Some have claimed Iowa is facing a deficit. Let’s be clear: this isn’t a deficit – it’s the result of the state collecting more from taxpayers than it needed.”
We agree that lower taxes should spur more revenue in the long term, but the economic outlook for Iowa’s economy in the short term, which is inextricably tied to agriculture and manufacturing, is uncertain, especially if burdensome tariffs persist.
According to the same Fitch Ratings analysis, “over the longer term, additional budgetary action may be necessary to maintain structural balance if natural revenue growth does not bring revenues and spending into alignment.”
Let’s be extra cautious in the next legislative session so that our strong financial reputation isn’t degraded.
