Iowa has been rated as one of the most fiscally prudent states for several years running, due to sound tax and spending policies. Yet thanks in part to a recent downturn in the agricultural economy, economic growth in the state has slowed.
Additionally, the state has been losing residents to other states every year since 2013 and has one of the highest outflows of young residents with bachelor’s degrees, leading to some concern over a potential “brain drain.”
Though government spending is often lauded as a tool for addressing these sorts of trends, Iowa will be better served by continuing to follow a path of fiscal conservatism.
Consider Iowa’s neighbors, Minnesota and Illinois. Both states have experienced similar economic headwinds in recent years, with falling crop receipts and declining agricultural employment contributing to falling gross domestic product growth in both states. Like Iowa, both states have also been losing residents to other states. Yet unlike Iowa, these states have chosen to confront these problems through the avenues of taxing and spending.
In Minnesota, for example, the general fund budget increased 36% between the 2022-2023 biennium and the 2024-2025 biennium. Since 2023, the state has also raised taxes on both the wealthy and the middle class, increased taxes on businesses, and increased sales taxes, among various other tax increases.
Illinois has also pursued an expansive tax policy and has additionally extended substantial tax breaks to large corporations. According to the IRS, Illinois is second only to New York for net out migration. Minnesota is not far behind.
The lesson is clear: A state cannot tax and spend its way into prosperity. The major benefit Iowa has over its closest neighbors is its recent history of fiscal responsibility. It would be a major misstep to reverse course.
For several years, the budget has been in surplus. The fiscal year 2025 surplus is projected over $2 billion, and fiscal year 2026 is expected to close with a $1.6 billion surplus. Reserve accounts remain full at $849 million, and the Taxpayer Relief Fund will hold $3.6 billion.
Iowa’s tax code is also becoming more competitive after abandoning the multi-rate progressive income tax structure for a low single-rate flat tax. The income tax rate has been reduced by nearly 60%, from a top rate of 8.98% to 3.8%. The corporate rate has fallen from 12%, which was the highest in the nation, to 7.1% and it is scheduled to be reduced even further.
Gov. Kim Reynolds also launched a major reform of state government. “We consolidated agencies (from 37 to 16), eliminated 1,200 burdensome regulations, remade legacy systems, centralized programs, and leveraged technology,” Reynolds stated in describing government and regulatory reform. These reforms have already saved taxpayers $217 million, exceeding original projections just within the first 18 months.
Fitch ratings have affirmed Iowa’s AAA credit rating as a result of these fiscally conservative policies. Fitch noted the “stable economic and employment trends and solid near-term revenue growth prospects.” In addition, the rating “reflects the state’s historically well-managed budget and fiscal operations and low debt and net pension liability burdens.”
Iowa is still confronted with many economic challenges, which is especially true of the rural Midwest. Nevertheless, policymakers can continue to make Iowa more competitive by enacting policies that will encourage economic growth. Property tax reform is crucial in this regard. Iowa’s high property tax system not only hurts taxpayers but is a deterrent to economic growth and attracting new people.
Another danger confronting Iowa is the temptation to increase spending. The fiscal year 2026 budget of $9.4 billion was over a 5% spending increase from the previous year. Rising spending trends could jeopardize long-term stability and prevent future income tax reform.
Iowa’s fiscal discipline has helped the state weather past economic uncertainty while advancing tax reforms. By enacting stronger spending limits, adopting better budgeting practices, auditing programs for efficiency, reducing reliance on federal funds, and continuing to streamline state government, Iowa can preserve its fiscal health and ensure taxpayer dollars are spent wisely, thereby encouraging both population retention and economic growth.
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