Iowa panel predicts state tax revenue will fall by 9% in fiscal year 2026

The Iowa Revenue Estimating Conference on Oct. 16 lowered its estimates for the state’s tax revenue in fiscal year 2026 by $375 million compared to predictions from March of this year.

The panel, chaired by Iowa Department of Management Director Kraig Paulsen, made changes to the revenue estimates in light of recent economic shifts and tax policy changes like the federal “One Big Beautiful Bill Act.” The nonpartisan Legislative Services Agency reported the state’s revenue in fiscal year 2025 was $198 million below the panel’s March forecast because of the impact of federal tax law changes.

Paulsen said the new REC estimates account for both the reduced state revenue due to federal tax policies, the impacts of the state’s 2024 acceleration of previously approved income tax cuts, as well as economic factors like rising unemployment rates and China’s move to import soybeans from South American countries instead of U.S. producers.

The state revenue is forecast to decline by 9% in FY 2026, more than the March forecast’s 4.8% estimated decrease. This lowers the predicted state revenue from $8.5 billion in the current fiscal year to a projected $8.1 billion.

Iowa lawmakers and Gov. Kim Reynolds approved a $9.4 billion budget this year, meaning the new projections have increased the expected gap between the state’s income and spending to $1.3 billion. Republican leaders have repeatedly said they were planning to take money from the Taxpayer Relief Fund and the state surplus to finance income tax cuts. Paulsen said the state has roughly $6 billion in the Taxpayer Relief Fund and other reserves that will be used to weather expected revenue decreases.

Paulsen said GOP leadership sees the state revenue change as allowing Iowans to keep more money through collecting less in income taxes.

“This reduction in revenue also does not mean the state is in a poor economic condition, but that revenue previously being collected by the state, once again, is being left in the pockets of hardworking Iowans,” Paulsen said. “Obviously, we are not in a period of the state’s most robust growth, but we do continue to see growth.”

But Democratic state leaders said the latest REC figures show Republican budgeting practices will lead to financial struggles for the state government in future years. Sen. Janet Petersen, D-Des Moines, criticized GOP leaders for drawing from one-time funding through the state’s reserves for initiatives like the income tax cuts and Education Savings Account program, providing public funding for private school tuition and associated costs, while not providing more funding for public education.

“Statehouse Republicans created a billion-dollar budget deficit with their corporate tax cuts and private school vouchers,” Petersen said in a news conference. “This isn’t just a dip in revenues. This is a historic drop.”

Paulsen and the two other members of the panel said though they are predicting further drops in revenue in FY 2026 during a time when the state is already drawing on reserve funds, they believe Iowa is still in a strong financial position entering FY 2027 and future years.

Paulsen said he still believes revenue will rebound in future years, though Jennifer Acton, director of the LSA Fiscal Services division, said this prediction may be sidetracked if an economic recession occurs.

Paulsen said, “based on what we know today,” the REC was not anticipating a recession on the horizon, but said he believes the state is in a sound fiscal place for fiscal years 2026 and 2027.

“Is this where we want to be? Is the most comfortable spot? No,” Paulsen told reporters. “But we’re in a really good spot, and … the state of Iowa is in a good financial condition.”

The REC meets again in December, when it will make the official revenue estimate to be used in the 2026 legislative session.