State panel: Iowa’s budget gap narrows slightly as state, federal economies remain ‘mixed’

DES MOINES — Iowa will need slightly less money from state coffers to cover a budget gap after revenue estimates saw a small uptick since October, primarily driven by higher collections from consumer spending.

During its meeting on Thursday, the three-member Iowa Revenue Estimating Conference, the nonpartisan panel that provides determinations on the state budget, said higher than expected consumer spending and optimism spurred by federal aid packages for farmers increased estimated state revenue compared to its projection this fall.

Initially, the panel estimated the state would bring in roughly $8.1 billion, which would have left a $1.3 billion budget gap after the Iowa Legislature budgeted to spend $9.4 billion this fiscal year.

But the new REC estimate shows that the state is expected to bring in about $18.4 million more than previously estimated, meaning Iowa’s general revenue dipped by 8.9 percent instead of 9.1 percent.

Jennifer Acton, director of the Iowa Legislative Services Agency’s Fiscal Division, said many moving pieces in the economy — including delays in federal economic data caused by the shutdown, uncertainty in international trade policy and conflicting consumer trends — are leaving the current economic outlook “mixed.”

“The current economic picture for Iowa remains mixed; with state and national economic indicators presenting conflicting signals and limited federal data since October's meeting, some caution is due,” Acton said.

REC Chair and Iowa Department of Management Director Kraig Paulsen said while he believes the state is in a “strong” fiscal position, Washington, D.C. is the “biggest wild card” as ongoing changes at the federal level create challenges for the state budget projections.

“Today's executive branch and legislative branch recommendations are remarkably close,” Paulsen said. “There continues to be uncertainty at a national level, which makes our task today somewhat more difficult.”

Iowa Gov. Kim Reynolds said Iowa Republican budget priorities, including the state’s 3.8 percent income tax, mean Iowans get to keep more money in their pockets.

“The December REC projections, a slight increase from the October projections, are a direct reflection of the fiscally conservative agenda we’ve put into practice — returning tax dollars to Iowans coupled with responsible spending centered on growth,” Reynolds said in a statement Thursday.

Farm economy, consumer trends drive revenue increase

During its October meeting, the REC cited headwinds in the agriculture economy due to losses in key markets for Iowa farmers and ongoing tariffs as some of the primary sources of the state’s revenue dip.

While the panel’s members noted that farmers are still facing financial strains, recent changes at the federal level are creating optimism. Earlier this week, the Trump administration released a $12 billion aid package for farmers funded by tariff revenue. In recent weeks, China, Iowa’s largest importer of soybeans, agreed to resume purchases of the crop from the U.S. after a monthslong pause.

“We already know that … with the recently announced $12 billion in support payments for ag that certainly will help fill the gap until some of these terrible trade issues,” Jeff Plagge, the panel’s public member, said.

Price hikes caused by tariffs that are expected to extend into 2026 and mixed consumer sentiment were other factors that created uncertainty in the budget projection process, the REC members said.

The panel pointed to a report by Moody's, a financial analytics company, showing American consumers were paying 39 percent of tariff costs, with businesses and companies paying 43 percent through August, hitting small businesses especially hard. But depressed consumer confidence in the economy, combined with record holiday spending this season, are sending mixed signals from consumers, Paulsen said.

“There's conflicting information, but the receipts continue to be strong into the state,” Paulsen told reporters.

Revenue expected to climb in 2027

After seeing revenue dip since statehouse Republicans passed the first of several bills cutting state income taxes starting in 2017, state revenue is projected to increase for the first time in several years in fiscal year 2027, according to the REC’s estimate Thursday.

In fiscal 2027, state revenue is projected to climb by $340 million, an increase of 4.2 percent compared to 2026.

Paulsen on Thursday told reporters that he anticipates the gap between state revenue and state spending will close in the coming years.

On Thursday, Iowa GOP lawmakers touted the REC’s new projections. Iowa Senate Majority Leader Mike Klimesh, of Spillville, said Republican lawmakers will continue to maintain the “responsible, sustainable, conservative” principles they have used in the last few years.

“Today, the REC restated what we already knew, which is a temporary decrease in tax collections is due to the implementation of Iowa’s historic flat tax,” Klimesh said in a statement Thursday. “The state budget is a result of conservative, thoughtful and responsible budgeting, and it continues to be in a strong position fiscally.”

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Republican Rep. Gary Mohr of Bettendorf, who chairs the Iowa House Appropriations Committee, said the new REC projections show that the state is on the “right track” as Iowa GOP lawmakers continue to deliver a “responsible budget.”

"A temporary decrease in revenue was not just expected after cutting income taxes, it was a part of the plan," Mohr said in a statement Thursday. "Iowans have been overpaying in taxes, and Iowa Republicans believe it's better to have money in your pocket than in government coffers.”

Democrats criticize budget gap

Iowa Democratic lawmakers on Thursday criticized Republicans for the budget gap, arguing that it was caused in part by corporate tax breaks and spending on the Education Savings Accounts, which use public money to fund scholarships for students to attend private schools.

Iowa Democratic Sen. Janet Petersen of Des Moines, the ranking member of the Iowa Senate Appropriations Committee, said Iowans don’t feel better off based on the new budget projections and are still struggling to keep up with the cost of living.

“No matter how Gov. Reynolds and Statehouse Republicans try to spin it, they’ve strapped Iowa with a historic, billion-dollar state budget deficit,” Petersen said in a statement. “Republican lawmakers have been in charge of the budget for almost a decade, overpromising economic growth and underdelivering for Iowans.”

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State Rep. Megan Srinivas, a Democrat from Des Moines who is the ranking member on the Iowa House Appropriations Committee, said the GOP budget decisions risk sending Iowa into a “fiscal death spiral” and said the state should be using funds from its Taxpayer Relief Fund to provide “meaningful property tax relief for working Iowans” instead of using it to fund the budget gap.

“Families are struggling with higher costs and rising property taxes. Yet Republicans have cut taxes for big corporations, removed income caps on private-school vouchers so they overwhelmingly benefit wealthy families, and supported failed trade policies that are dragging Iowa’s economy down,” Srinivas said.