Gov. Kim Reynolds, joined by Lt. Gov. Adam Gregg, left, Sen. Dan Dawson, right, and other lawmakers and lobbyists, signed into law on May 1, 2024, a bill that will reduce Iowa’s individual income tax rate in 2025. (Photo by Robin Opsahl/Iowa Capital Dispatch)
If I was in charge of the state budget and had just watched $825 million unexpectedly disappear, I suppose I’d try to bluff my way out of this mess, too.
Which is what the Reynolds administration looked like it was doing last week, when the state’s Revenue Estimating Conference said the 2025 fiscal year ended with $300 million less than they’d expected a year ago.
For the current fiscal year, 2026, they’re now anticipating a whopping $525 million less than predicted last October.
I touched on this trend in last week’s post about Iowa’s long-suffering economy, but after I published, the news from the REC got so much worse.
No wonder the ruling party was putting on a brave face and trying to convince Iowans this was all part of the plan. But they’re not very good poker players. Their tells were all over the place.
Take Kraig Paulsen, chairman of the REC who runs the Reynolds administration’s department of management. Federal tax changes will reduce state revenues and, Paulsen conceded, the economy isn’t going as well as they’d like. “Obviously, we are not in a period of (the) state’s most robust growth, but we do continue to see growth,” he said.
Call that a concession, albeit with a big dollop of spin.
In the first quarter of 2025, our GDP didn’t grow. It shrunk. We rebounded somewhat in the second quarter, but the longer-term trend is awful. Last year, the size of Iowa’s economy, when compared with the rest of the states, fell to its lowest ranking in 27 years.
Robust? That word doesn’t belong in the same sentence as the words “Iowa economy.”
Maybe not even in the same paragraph.
Gov. Kim Reynolds claimed revenues were down “just as we projected.” But the steep level of decline the REC now predicts is not what her administration projected, according to documents a Senate Democrat obtained via an open records request earlier this year.
Rep. Gary Mohr, who chairs the House Appropriations Committee, tried to shift attention to Joe Biden.
This is a standard play for the GOP when all else fails. But it wasn’t Biden who told Iowa’s ruling party to pass a flat income tax that gave $67,000 to the average millionaire and $600 to the average Iowa family. It wasn’t Biden who told congressional Republicans to pass a budget and tax plan this year that will give the average millionaire $80,000 and then tried to cover it by slashing $1 trillion from Medicaid. And it wasn’t Biden who told them to support a tax on foreign imports that is driving up consumer prices.
That’s on the GOP.
To be clear, watching this much money disappear from the state budget is not what Iowa’s ruling party was expecting when, in the spring of 2024, they accelerated the state’s flat tax to take full effect this year.
Anne Discher, executive director of Common Good Iowa, probably had the most salient reaction to the REC’s new estimates when she said, “If all were proceeding according to plan, one would think they would be meeting their projections, not falling short again and again.”
Exactly.
This is not part of the plan. Instead of facing a $900 million deficit for 2026, which lawmakers expected at the end of the last legislative session, the state now faces a projected $1.3 billion deficit.
That’s 16% of projected general fund revenues. That’s huge.
To put that into perspective, Illinois — whose state budget is roughly six times larger than Iowa’s—has a projected shortfall this year that’s only a fraction of ours, $267 million.
Meanwhile, Illinois’ economy is growing faster than Iowa’s.
It’s true that Iowa has more than $6 billion in reserves, which is a good backup to have. Federal COVID funds, a nationwide economic boost coming out of the pandemic and withholding state spending on healthcare and public education have built up this surplus. Still, Republicans clearly are having to lean on those reserves a lot more than they expected.
Thus, the attempt to bluff you into believing this is all part of the plan.
It’s not. Nowhere in the news stories in 2024 about the Republicans’ mad dash to a flat tax did I read about a projected $1.3 billion deficit.
There’s a reason I didn’t read about it: They weren’t expecting it.
The GOP’s alternate play is to say this is money Iowans no longer have to pay in taxes. And that part is true. But the rich have gobbled up a lot more of that money than you have. That $6 billion budget surplus they’re draining is going to pay for a flat tax that’s stuffing more than $110 into the average millionaire’s pocket for every $1 that you’re getting.
Meanwhile, the GOP has been quietly raising more money each year from sales and excise taxes, which take a bigger percentage out of your income than they do a millionaire’s.
That, my friends, has definitely been part of the plan.
The numbers crunchers at the REC now say general fund revenues should rise in 2027 over this year’s projection. But as Discher said, this estimate should be taken with “great caution.” (And even if it turns out to be accurate, it will still be several hundred million dollars less than what the Reynolds administration had anticipated.)
The truth is Iowa’s ruling party is treating the state’s budget like a casino. They bet the farm a top-heavy income tax cut would awaken Iowa’s sleepy economy, and they’re losing. But instead of walking away from the table, they’re letting it ride, betting they’ll hit the jackpot the next hand. Or maybe the one after that. If they don’t? Well, they’ll just keep trying to bluff their way through this mess.
That’s not good for Iowa’s future. It’s time we called their bluff.
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