Success has many fathers, according to an old saying, but failure is always an orphan. The secure foundation of Iowa’s fiscal house proves the adage, with both fiscal conservatives and big-government advocates crediting their respective policies.
The former claim Iowa’s fiscal health is a direct result of conservative budgeting and governance, which Gov. Kim Reynolds and the Republican-led legislature have made a priority. On the strength of their policies, Iowa not only weathered the COVID pandemic’s economic downturn, but also is navigating America’s economic uncertainty marked by high inflation and international strife. The priorities of Iowa government have been met even as it has been a responsible steward of taxpayer dollars.
In contrast, critics of Iowa’s fiscal conservatism argue the credit for the state’s strong financial foundation belongs to the federal government. It is, they say, a direct result of the massive level of stimulus Uncle Sam spent during the COVID pandemic. Federal stimulus programs included the CARES Act, the American Rescue Plan Act (ARPA), and several others that poured dollars into Iowa, which received over $10 billion in federal stimulus.
Iowans also received direct payments during the pandemic, including individuals, small business owners, and farmers. The direct stimulus payments not only helped cushion paychecks, but also provided extra money for individuals and families to spend. This injected money into the economy, which is one reason sales tax revenue remained strong.
Certainly, such windfalls of cash can buy a whole lot of paint and caulk to temporarily freshen a fiscal house, but the foundation is another matter. Prior to the pandemic, in 2018, Gov. Reynolds signed the state’s first major tax reform law in decades, not only lowering income tax rates but also broadening the sales tax base. She then kept Iowa’s economy open throughout 2020, whereas other states took federal payments as an opportunity to impose excessive caution. Thus, the sales tax reform maximized sales tax revenue during the pandemic, especially with such heavy online purchases.
With the state maximizing the benefit from direct federal stimulus payments to individuals and businesses, Gov. Reynolds and the legislature upheld the other side of the ledger by not using short-term federal stimulus dollars to fund ongoing General Fund programs. The legislature prudently passed a status quo budget, limiting spending to reflect the economic uncertainty.
As a result, Iowa emerged from the pandemic one of the strongest and most fiscally stable states. Following the pandemic, Gov. Reynolds and the legislature continued to follow their fiscally conservative agenda. For several fiscal years, Iowa’s budget has been solidly in the black, racking up astonishing surpluses: $1.24 billion in FY21, $1.91 billion in FY22, and $1.83 billion in FY23. A $1.9 billion surplus is projected for FY24, and another surplus is already projected for FY25.
The Cash Reserve Fund and the Economic Emergency Fund — Iowa’s two “rainy day” funds — have consistently been full at their maximum statutory levels. For FY24, both funds have over $960 million. The surpluses are also fueling growth in the Taxpayer Relief Fund, which has a balance of $3.7 billion for FY24 and a projected increase from there.
These budget surpluses are the direct result of conservative budgeting, which did not permit spending money simply because the state had it in hand. By statute, the Iowa Legislature can only spend 99 percent of its estimated revenue, and only with passage of the FY25 budget is the state seeing an increase in spending approaching that threshold. The $8.9 billion FY25 budget spends only 95.23 percent of estimated revenues, greater than the 88.25 percent of estimated revenue represented by the $8.5 billion FY24 budget.
Understanding what policies deserve credit for Iowa’s success allows the state to continue along its successful path. During this session, the legislature passed a tax relief measure accelerating implementation of earlier reforms and lowering the flat tax from 3.9 to 3.8 percent. Both the personal and corporate income tax rate reductions were implemented responsibly and enacted without any budget cuts.
Revenue continues to be stable and increasing. In fact, the legislature has yet to utilize the Taxpayer Relief Fund to “pay” for rate reductions or cushion the budget. The Taxpayer Relief Fund can be used if needed as the 3.8 percent flat tax takes effect in 2025, but current projections estimate it will not be.
Naturally, critics of fiscal conservatism warn vital services will go underfunded to support tax cuts that only benefit the wealthy. Each legislative session these critics make the same doomsday predictions, and each year, they fail to come to fruition. Government spending has continued its steady increase.
None of the above is meant to discount the federal government’s influence on Iowa. Every state is dependent on federal funds to administer a variety of programs, especially Medicare. In FY23, Iowa received $11.8 billion in federal funds, and the FY24 figure is estimated at $10 billion. Nevertheless, Iowa’s fiscal foundation owes its strength not to federal stimulus dollars, but to conservative budgeting. Iowa has controlled spending while many other states increased it, pushing taxes up. As a consequence, Iowa’s fiscal health is much better than that of California, New York, or even our neighbors, Minnesota and Illinois.
As federal stimulus dollars work their way out of the system, the national economy remains wobbly, with the continuing problems of inflation and international instability. Iowa is well-prepared, however, because Governor Reynolds and our legislators, not Uncle Sam, have built a strong foundation.
