Iowa revenue expected to dip as tax cuts take effect

DES MOINES — Iowa state revenue is expected to decline slightly in fiscal 2024 and 2025, owing largely to recent income tax cuts, a panel of revenue forecasters reported Thursday.

The latest projections from the Iowa Revenue Estimating Conference — which will guide lawmakers on how much money they have to spend — predict state income in the fiscal year that started July 1 will fall by 0.9 percent from the fiscal 2023 level. The state revenues this budget year are expected to be $9.75 billion.

Iowa’s revenue in fiscal 2023, which ended June 30, was $9.85 billion, a 0.4 percent increase from the previous year.

“The state is showing a modest slowdown in revenue. However, those reductions are planned and being driven by the tax rate reductions for Iowa taxpayers,” said Kraig Paulsen, the director of the Iowa Department of Management and chair of the panel.

By fiscal 2025, revenue is expected to drop by another 1.8 percent, to $9.58 billion.

Meanwhile, the state's GDP grew 5.2 percent in the first quarter of 2023 and consumer spending is expected to keep sales tax receipts high, Paulsen said.

Planned cuts to individual and corporate state income taxes will drive the revenue downturn, according to the report. Personal income tax revenues are expected to fall by nearly $300 million in fiscal 2024, and another $120 million in fiscal 2025.

Republican Gov. Kim Reynolds signed a major tax overhaul law in 2022 that set Iowa's individual income on the course to a flat tax of 3.9 percent for all income brackets, and intended to lower corporate taxes to 5.5 percent if revenues hit a certain target each year.

Republicans say finances are strong

Iowa Republicans have passed budgets significantly lower than revenue for years, and the state ended the last fiscal year with a $1.83 billion budget surplus. Reynolds and Republican leaders have promised to pass more tax cuts in the upcoming legislative session.

“Iowa’s revenue is growing, but instead of being taken by state government, that money will stay with taxpayers — where it belongs," Reynolds said in a statement.

“The tax cuts passed in 2022 are not just sustainable, they are producing the economic growth predicted,” Senate Majority Leader Jack Whitver, R-Grimes, said in a statement. “I expect more relief for taxpayers next session because the state still is taking too much of their money.”

In a statement Thursday, state Rep. Gary Mohr, R-Bettendorf, who chairs the House Appropriations Committee, said the projections confirm that Iowa’s financial situation is healthy.

"Thanks to Iowa House Republicans' responsible budgeting practices and tax policy, the State of Iowa is in a far better position to handle any economic downturns thanks to Bidenomics than states such as Illinois,” he said.

But, he cautioned, headwinds like inflation are still presenting challenges to Iowans, and he advocated for continuing to lower Iowans' tax burden.

Democrats warn of corporate tax cuts

But Democrats said the revenue drop represents tax cuts for corporations and top earners --- without significant relief for low-income Iowans.

“Iowa’s revenue growth cannot keep up with the costs of Governor Reynolds' corporate tax cuts and private-school voucher spending,” Senate Appropriations Committee Ranking Member Janet Petersen, D-Des Moines, said in a statement. “Today’s revenue estimate is a warning for Governor Reynolds and statehouse Republicans: your special-interest spending spree isn’t sustainable and it leaves too many taxpayers behind.”

Rep. Timi Brown-Powers, D-Waterloo, the ranking member of the House Appropriations Committee, echoed those concerns.

“As we travel across the state, we hear the same thing from Iowans: they are tired of politics and endless tax breaks for corporations and the super-rich,” she said in a statement.