Iowa's revenue shortfall becomes political fodder for 2026 campaign

Yahoo

23-05-2025

(Photo illustration with Capitol photo by Iowa Capital Dispatch and background via Getty Images)
The Iowa state government will be dipping into reserve funds to meet spending obligations in the 2026 fiscal year under the budget passed by lawmakers in 2025 — a decision Republican leaders said was accounted for when they approved income tax cuts, but that Democrats said could leave the state in a risky position in the case of economic downturns.
The merits of the state tax cuts and Republicans' budget decisions have become partisan talking points in the early days of the 2026 campaign, as candidates begin to position themselves to run for governor and other offices.
Here's a look at some of the key budget decisions lawmakers made this year:
The $9.425 billion budget came in above the $8.5 billion in projected revenue for FY 2026. To finance the difference, lawmakers approved taking an estimated $917 million in funding from the state's reserves, Taxpayer Relief Fund and budget surplus from previous years to fully fund state priorities. In later negotiations, legislators also agreed to use $26 million from the Iowa's Sports Wagering Fund to provide money for priorities like paraeducator pay and the public safety equipment fund.
The FY 2026 budget will fund the state beginning July 1, 2025. It's contains $478.1 million more — or 5.34% — than the FY 2025 budget of $8.947 billion.
SUBSCRIBE: GET THE MORNING HEADLINES DELIVERED TO YOUR INBOX
House Minority Leader Jennifer Konfrst said Iowans should be aware that this year's budget reflects an unsustainable spending model for the state, as the funds being used to make up for the revenue shortfall are one-time money.
'It's important that Iowans know that we're spending on ongoing expenses out of the state savings account, and that that's not a sustainable way to govern,' Konfrst, D-Windsor Heights, told reporters at the end of the 2025 legislative session. 'And the reason for that is because Republicans, who have been in charge for 10 years, have been unable to manage this budget in a way that's truly going to be responsible and actually be good stewards of taxpayer dollars.'
The state's budget — and the factors that led to decreased revenue — are likely to be a major talking point for Democrats heading into the 2026 election season. One of the largest reasons why Iowa's revenue fell was because of recent cuts to individual and corporate income taxes.
In 2024, Gov. Kim Reynolds signed into law a measure speeding up previous income tax cuts, which reduced the individual income tax rate from 5.7% in 2024 to a single 3.8% rate beginning in 2025.
House Speaker Pat Grassley said Friday on an episode of 'Iowa Press' that Republicans chose to make this cut — knowing that the move would cause a loss in state financial returns — because Iowans had 'overpaid' through income taxes in previous years, money that went into the Taxpayer Relief Fund. The Taxpayer Relief Fund holds $4 billion, and that's just one of the state's pots of unspent money. There's also a $2 billion general fund surplus and $961 million in Iowa's reserve accounts.
'The reason we felt confident in being able to do (tax cuts) is we felt we had an overcollection from Iowans, we needed to get that back into their pockets,' Grassley said. 'I think what we've done as we approached this, we expected that there may be less revenue coming in, but typically when you cut taxes that is what comes with it. Thankfully, we have those backstops there that were in place for that reason. And, like I said, in a $9.4 billion budget, the state of Iowa is sitting on roughly $7 billion between those accounts that I just touched on. I think that puts us in a very strong position and why we felt confident and still feel confident moving forward.'
He said this funding is being used to 'offset any of those bumps in the road' in the implementation of tax cuts, but said Republicans believe the state's revenue will increase again because the tax cuts will stimulate the Iowa's economy.
But Democrats said while these savings can be used to make up for current budget shortages, these should not be relied on to meet the state's spending obligations. Following the March Revenue Estimating Conference, Sen. Janet Petersen, D-Des Moines, released information from the Iowa Department of Management's five-year budget projections, obtained through a Freedom of Information Act request, that found the Reynolds administration's budget plan for the next five years would continue to draw money from the state's reserves, Taxpayer Relief Fund and Economic Emergency Fund.
'Republicans are breaking their own rule of using one-time funds for ongoing expenses, and Iowa taxpayers are footing the bill,' Petersen said in a statement.
During floor debates on appropriations bills, Democrats repeatedly emphasized the larger problems with the FY 2026 budget, saying the Legislature should not be drawing money from savings and reserves to fund annual expenses. Sen. Sarah Trone Garriott, D-West Des Moines, criticized Republicans during floor debate on the health and human services budget bill for both irresponsible budgeting practices and for ot providing enough funding to meet Iowans' needs in their proposal.
'One of the biggest pieces that we have to talk about here is how the majority party's failed economic policies mean that we don't have enough revenue to cover this inadequate budget,' Trone Garriott said. '… We could do a lot better for a lot of people, and I'm sorry that we're not making that effort in this budget.'
Trone Garriott, as well as Konfrst, are running as Democratic candidates in Iowa's 3rd Congressional District in 2026, and have been critical of both state and federal GOP budget practices. Discussions on Iowa's budget could also play a role in statewide elected races, like in the gubernatorial race. As Reynolds announced that she will not seek reelection, multiple Republicans — including Speaker Grassley — have said they are considering running to become the GOP nominee in 2026.
Though the budget has been approved by lawmakers, the governor still must sign off on the appropriations bills. She has the ability to line-item veto specific funding provisions within these budgets, meaning funding for some of the provisions approved by the legislature could be cut by the governor.
As it stands, here are some of the ways state money is appropriated in the upcoming year's budget:
An expense that Democratic legislators have repeatedly criticized and pointed to as a place for cuts is the Education Savings Account (ESA) program. It provides state dollars for K-12 students' private school tuition and associated costs. The program, approved in 2023, has limited Iowans' eligibility based on income for the first two years of implementation. Beginning the the 2025-2026 school year, families of any income level can receive the public funding for private school costs through the program.
The most recent estimates put ESA spending at $314 million for the upcoming year, a roughly $96 million increase from the current fiscal year.
There is not an appropriations limit for the state program, meaning the estimate could differ from how much is actually spent. The money in ESA accounts is tied to the state's state supplemental aid (SSA) rate for per-pupil spending for public K-12 schools — $7,988 per student for the upcoming school year.
Lawmakers passed a 2% SSA rate for the FY 2026 budget as part of a total $3.9 billion in spending for the state's public K-12 school system.
This is not the only money going toward Iowa education in this year's budget. Senate File 647, the education appropriations bill — separate budget from SSA — allocated more than $1.033 billion. Much of that funding went to Iowa's higher education institutions, which included a $7.5 million funding increase for the Iowa community colleges and a $5.5 million increase for the Iowa Board of Regents governing the state's public universities.
Additionally, lawmakers passed Senate File 660, a measure providing $14 million to fund a pay supplement for paraeducators and other educational support staff through the Sports Wagering Fund. This money, one of the hold-ups in budget negotiations between House and Senate Republicans, was a funding component approved in 2024 as part of the law making changes to Iowa's Area Education Agencies (AEAs) but was not included in the budget proposal agreed upon between Senate Republicans and Reynolds.
The state's standing appropriations bill, which contains SSA funding as well as other state spending obligations, also contained a $25 million reduction in funding for AEAs.
Another large piece of state spending was allocated through House File 1049, the state's health and human services budget. The $2.469 billion appropriations bill funds the Iowa Department of Health and Human Services and Department of Veterans Affairs.
A majority — $1.903 billion — of the spending goes to Medicaid and related state programs, including the Iowa Health and Wellness Plan (IHAWP, providing expanded Medicaid health coverage, and the Healthy and Well Kids in Iowa (Hawki) program for uninsured children of low-income families. This year's budget included a $230.4 million increase to make up for expected funding shortfalls for Medicaid and Hawki.
Rep. Ann Meyer, R-Fort Dodge, said during floor debate the state was 'fully funding Medicaid' through the bill, but Democrats questioned whether state funding will be sufficient considering Medicaid cuts currently being considered by Congress.
The appropriations measure includes $20 million for nursing facility providers' Medicaid rate rebasing, higher reimbursements for maternal health providers, and an increase from $50 to $55 in personal needs allowances given to individuals on Medicaid in care facilities each month.
It also includes a restriction on Medicaid coverage, banning payments through the health plan for transgender Iowans seeking physical medical interventions for the treatment of gender dysphoria, such as sex reassignment surgery and hormone treatment therapy. The bill was amended from an earlier version that included language to stop Medicaid coverage for all forms of gender dysphoria treatment, including mental health care.
Democrats still argued the provision was unjust, as it prevented Iowans from receiving lifesaving medical treatment. Sen. Molly Donahue, D-Marion, argued the measure violated the Equal Protections Clause in the U.S. and Iowa constitution, as it would deny a group of people medical treatment that remains accessible to others. Cisgender people could still receive hormone therapy if deemed medically necessary, Donahue said as an example, while transgender people could not.
Medicaid coverage for transition-related treatments was brought up as one of the motivators to remove gender identity from the Iowa Civil Rights Act earlier in the 2025 legislative session. Previous attempts by Republican lawmakers to ban Medicaid coverage for transgender Iowans were struck down because of the protections provided by the Iowa Civil Rights Act, and the Iowa Supreme Court has not weighed in on the constitutionality of such a ban.
Another component of health-related spending passed this year was allocation of money from the Opioid Settlement Fund. Lawmakers have failed in previous legislative sessions to pass a bill distributing money from the fund, which currently contains more than $56 million, but were able to get House File 1038 to the governor's desk in 2025.
The bill appropriates $29 million from the fund to HHS for disbursement to several specific organizations and programs working on addiction prevention, treatment and recovery programs in FY 2026. In future years, money will be allotted from the fund to state agencies, with HHS receiving 75% and the Iowa Attorney General's office receiving 25%, with these entities then choosing where the money will go. Iowa is expected to receive more than $325 million in the fund between fiscal years 2021 through 2039, according to the AG's office, with settlement funds split between local governments and the state.
House lawmakers including Rep. Gary Mohr, R-Bettendorf, said he was disappointed with some aspects of the measure, but that the compromise was needed or else 'we would have gone a third year without using these funds to address opioid abuse in Iowa.' The Opioid Settlement Fund, created in 2022, is money collected by Iowa through lawsuits brought by states against drug manufacturers, distributors and pharmacies for their roles in the opioid epidemic. A majority of this money, 85%, is obligated through the cases to be spent on opioid addiction treatment and prevention.
Democratic lawmakers said they were frustrated that the Opioid Settlement Fund money will be distributed through HHS and the AG's office under the agreement, arguing this structure will provide less oversight and input from communities in need, but supported the bill as a means to distribute money.
SUPPORT: YOU MAKE OUR WORK POSSIBLE
The combined spending for Iowa's law enforcement and courts systems came to a total of $924.9 million for FY 2026.
The judicial branch's budget, Senate File 648, came to $221.83 million. It included $1.27 million more in funding for judicial officer salaries, amounting to a 2.5% pay raise for justices and judges — an increase Iowa Supreme Court Chief Justice Susan Christensen called for in January to help Iowa be more competitive and help current issues with filling judicial vacancies across the state.
Senate File 644, the budget funding state law enforcement entities including the departments of Justice, Corrections, Public Safety and Homeland Security and Emergency Management, appropriated $703.1 million from the general fund, $20.6 from other funds and several standing appropriations. The budget included a $7.6 million increase for the state Department of Corrections, allocated to several state facilities and department efforts.
It also had a a $2.1 million increase for the Office of the State Public Defender — including a $1.95 million transfer from the Indigent Defense Fund and $100,000 from the College Student Aid Commission designated for the Rural Attorney Recruitment Assistance Program. Rep. Brian Lohse, R-Bondurant, said the bill includes a total increase of $1.07 million for indigent defense, raising the pay for attorneys who represent people who cannot hire a lawyer themselves by approximately $2 per hour.
Lawmakers also approved adding $150,000 in new money for the victims assistance grant fund, run through the state Attorney General's office, to provide services for human trafficking victims.
The upcoming fiscal year's funding for the Iowa Department of Agriculture and Land Stewardship, Iowa Department of Natural Resources and related state programs totaled $46.6 million from the general fund, in addition $99.4 million coming from other funds.
Senate File 646 shifts $2.5 million from the existing Brucellosis and Tuberculosis Eradication Fund and provides $1.05 million in new funding to create the Iowa Animal Disease Prevention fund, focused on efforts to research vaccines, track outbreaks and provide equipment to treat and prevent animal diseases. This was a change requested by Iowa Secretary of Agriculture Mike Naig following the outbreak of the highly pathogenic avian influenza.
The measure also makes changes to the Choose Iowa program focused on producers that sell food and goods grown in Iowa. It ends the Choose Iowa pilot purchasing program and creates the Choose Iowa Food Purchasing Program with a $200,000 appropriation going to food banks for the purchase of locally produced food. Democrats criticized the shift from the pilot program, that provided assistance to both food banks and Iowa schools, as the new food purchasing program did not provide funding for schools to be able to purchase locally grown foods.
The Resources Enhancement and Protection (REAP) program, funding local projects related to natural resources conservation and public spaces, received a $12 million appropriation from the Environment First Fund — a lower amount than the $20 million standing appropriation in Iowa Code given to REAP.
Administration and regulation: House File 1044 provides funding for several of Iowa's statewide elected offices as well as state agencies like the Department of Inspections, Appeals and Licensing (DIAL) and Department of Management and Department of Revenue. It also gives money for state entities like the Iowa Public Employees' Retirement System (IPERS) and the state Utilities Board.
This year, the Legislature allocated $73.7 million from the general fund and $134.2 million from other funds through this budget. This year, lawmakers approved a $1.2 million increase for IPERS to hire new staff, and $600,000 for the state's Insurance Division to increase oversight and regulation enforcement for pharmacy benefit managers (PBMs), the businesses that negotiate prescription drug prices between drug manufacturers, health insurance providers and pharmacies.
Economic development: The budget for economic development initiatives, Senate File 645, includes $74.7 million in total spending from the general fund and other state resources. The money from this appropriations pool goes largely to the Iowa Economic Development Authority, Iowa Finance Authority and the Iowa Department of Workforce Development.
This year's budget reduced funding for the World Food Prize and state tourism office, as well as money for several grant programs. But it also includes a $322,000 bump in funding for the Iowa Arts Council and $350,000 for the Council of Governments (COGS), money which can be leveraged with federal and local dollars to provide $3 million in funding for housing renewal projects across the state according to Rep. Shannon Latham, R-Sheffield. Latham said these projects can be taken on through the continuation of the Housing Renewal Pilot Program, which was extended for three years through the bill.
Rebuild Iowa Infrastructure Fund (RIIF): House File 1039 appropriates $163.8 million from the Rebuild Iowa Infrastructure Fund and the Technology Infrastructure Fund. Though House GOP lawmakers said during debate they could not reach an agreement for several RIIF funding priorities in budget negotiations with the Senate this year, there were still several projects that received funding through the fund this year. The Iowa Law Enforcement Academy received $15 million for the creation of a new driver training facility, and the state historical building received $5 million to buy new storage units for preserving historical artifacts.
Transportation: The state's transportation budget, $502.8 million for FY 2026, does not come from the general fund, but from the Road Use Tax Fund and Primary Road Fund. Senate File 628, providing funding for the Iowa Department of Transportation, included a $20 million increase in Road Use Tax Fund money to modernize the state's drivers and vehicles record system, as well as $18.9 million to renovate the DOT's Waterloo maintenance garage.
SUPPORT: YOU MAKE OUR WORK POSSIBLE