Common Good Iowa

Speeding faster to the bottom

Posted on May 9, 2024 at 10:27 AM by Mike Owen

The old saying is "a billion here, a billion there, and pretty soon you're talking about real money."

So how about $2 billion?

In Iowa, references by media and politicians to new tax cuts often understate the impact on services. While they note, accurately, that the latest tax bill cuts revenue by about $1 billion over three years,[1] they often miss the bigger picture.

In short, in FY 2026 Iowa revenues will be about $2 billion below what they would have been if not for tax cuts passed in 2022 and 2024 – equivalent to over 20% of the $8.9 billion state budget passed this year.[2] That $2 billion reduction already was in sight; now we’ll get there faster as the graph below shows.[3]

The 2024 bill merely finished the job started in 2022, as the tax-cut package signed May 1 by Governor Kim Reynolds deepened and accelerated cuts already in place. Instead of phasing in a 3.9% flat-rate income tax in tax year 2026, we’ll have a 3.8% rate in tax year 2025.[4]

Both plans overwhelmingly benefit the wealthiest Iowans. The latest one gives only 14% of the tax benefits to 65% of tax filers in the first tax year.[5]

For budget purposes, the biggest additional hit will come in FY 2026 – $605.6 million – the first full fiscal year under the 3.8% flat-rate income tax.

The official projected loss of revenue in FY 2026 is projected to hit $1.95 billion – two years earlier than anticipated under the previous bill.

For now we can all listen to the governor and her legislative allies and pretend it doesn't matter because we’re piling up surpluses – $2.4 billion in the coming year.[6] (There’s that $2 billion figure again!) We have stashed money away as the economy, boosted by federal aid, has kept revenues flowing – all while lawmakers have chronically underfunded investments in Iowa and its future.

By any responsible analysis, the implications are severe for Iowa to sustain public services expected by its residents – let alone to enhance them.

Supplemental State Aid comparison FY02-11 to FY12-25But the cuts do matter. Even without the impact of the recent cuts, Iowa has held per-pupil education spending growth at 2% on average for 14 years.

That doesn’t keep up. Schools already are announcing new cuts due to the funding issues, not just from low state support but the additional pressure caused by funding a second – and unaccountable – school system through private-school vouchers.[7]

Education is the biggest part of the budget, and while it’s being hit, it’s by far not the only example of meager support even before the new tax cuts take their toll, when surpluses fade and one-time reserves are tapped. State parks are another example – they cannot be maintained adequately because of underfunding.[8]

Common sense tells you it will only get worse.


Mike Owen is deputy director of Common Good Iowa. Contact:


[1] Legislative Services Agency, Fiscal Note, SF 2442, April 19, 2024. See Figure 5, General Fund Fiscal Impact.
[2] Legislative Services Agency, State of Iowa Projected Condition of the General Fund, page 1, Net Appropriations, Legislative Action FY 2025.
[3] The baseline for this graph is the 2022 LSA fiscal note for HF2317, June 23, 2022, and revenue projections current at that time. Revenue triggers in that bill caused some corporate income-tax cuts to take effect earlier, in FY 23 and FY 24, than indicated in the original table, Figure 2.
[4] Note: The flat rate tax of 3.8% will take effect Jan. 1, 2025, so it will only be in place for half of the first fiscal year in which it is implemented, ending June 30, 2025. The first full fiscal year with the new rate in place will be FY 2026.
[5] Table 2.2, Estimated Change in Individual Income Tax Liability by Taxable Income Level Under Proposal 2. Estimates for tax year 2025. Iowa Department of Revenue letter to Eric Richardson, Legislative Services Agency.
[6] Ibid, page 1, Ending Balance – Surplus, Legislative Action FY 2025.
[7] Grace King, The Gazette, Cedar Rapids. “$5.5 million cut from Iowa City schools budget next year.” March 27, 2024.
[8] Linh Ta, Axios. “Iowa state parks need $100 million in repairs.” March 26, 2024.

Categories: Budget & taxes

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