The non-partisan Legislative Services Agency released the official revenue numbers for Fiscal Year 2025, showing a bigger than expected reduction in state revenue thanks to the second year of the pass through entity tax (PTET). For the year, General Fund revenue came in at $8.9392 billion. This is $816.6 million lower than what the state took in in FY 2024, or a reduction of 8.4 percent.
The FY 2025 actual total was $192 million less than what was projected when the 2025 legislative session ended. Back in May, the adjusted REC estimate for the year was $9.1312 billion.
The pass through entity tax is paid by partnerships and S Corporations and other business pass-through entities. Previously, tax on this income was paid by partners at the individual income tax level. The PTET creates a voluntary election for a partnership or S corporation to be subject to Iowa income tax at the entity level and was applied retroactively beginning on or after January 1, 2022.
Due to the retroactive application of the PTET in FY 2024, the state’s coffers received net PTET payments of $862 million for fiscal years 2022, 2023, and 2024. While PTET was still a positive to the state in Fiscal Year 2025, the net receipts from it were $175 million. This means the vast majority of the reduction in General Fund revenues comes from the $687 million decline in net PTET revenue from FY 2024’s level.
The final FY 2025 report does contain good news that will surprise those who watch state revenue. Even with the January 2025 implementation of reducing personal income tax rates to 3.8 percent, net personal income tax revenue to the state actually grew in Fiscal Year 2025. The state collected an additional $43 million in personal income tax payments after refunds, which is a 1.1 percent increase over the previous year. Net sales and use tax collections were also higher, growing by 1.0 percent for the fiscal year. Corporate income taxes, which were also reduced during FY 2025 came in $40 million lower than FY 2024’s level.
My good friend State Representative Gary Mohr said it best in his statement:
“When we delivered much-needed tax relief to Iowans last year, we knew we would need to tap into our healthy Taxpayer Relief Fund to manage the decline in revenue. This decision was made intentionally because Iowans were desperate for immediate relief from former President Biden’s failed economic policies. Despite a mixed economic picture locally and nationally, Iowa remains in a strong financial position. We have over $6 billion in cash on hand, and our reserve funds are at their statutory maximums. Iowa is in a better position than most states to handle economic uncertainties due to Iowa Republicans’ responsible budgeting over the past decade. As we approach the Fiscal Year 2027 budget, we will continue to implement our level-headed budgeting principles that Iowans have come to expect.”