The Most Difficult Policy is the Most Important Policy: Conservative Budgeting in Iowa

Originally published at Iowans for Tax Relief Foundation. 

​Executive Summary
Iowa’s steadfast commitment to conservative budgeting demonstrates how fiscally responsible governance benefits all, fostering an environment of economic prosperity and opportunity. By prioritizing disciplined spending over government expansion, Governor Kim Reynolds and the state legislature have positioned Iowa as a national leader in fiscal responsibility.

The FY 2026 Conservative Iowa Budget, capped at $9.15 billion with a 2.7% growth rate, exemplifies this commitment to sustainable budgeting. Key elements of Iowa’s approach include aligning spending growth with population growth and inflation, ensuring fiscal stability while avoiding unnecessary tax burdens on residents.

Key Highlights:

1. Fiscal Discipline:
   Iowa’s budgeting model restricts spending growth to the combined rate of population growth and inflation, providing a sustainable framework that limits government expansion and prioritizes taxpayer interests.
2. Tax Reforms and Economic Growth:
   Iowa’s pro-growth tax reforms, including a transition to a 3.8% flat income tax in 2025 and the elimination of the inheritance tax, have reduced financial burdens on families and businesses. These changes enhance the state’s economic competitiveness.
3. Financial Strength and Surpluses:
   Conservative budgeting has resulted in consistent surpluses, fully funded reserves, and a Taxpayer Relief Fund projected to reach $4 billion by FY 2026. These financial resources enable Iowa to weather economic uncertainties and provide sustainable tax relief.
4. Sustainability through Spending Limits:
   Iowa’s model prevents abrupt government expansions and potential fiscal crises by maintaining spending limits tied to population growth and inflation, ensuring fiscal sustainability without overburdening taxpayers.
5. Path to Further Tax Relief:
   Surpluses have paved the way for significant tax cuts, with policymakers working toward eliminating income taxes. Proposed strategies include surplus triggers, strengthened spending limits, and leveraging the Taxpayer Relief Fund for sustained reductions.
6. Formalizing Fiscal Restraints:
   Advocating for constitutional spending caps, Iowa aims to institutionalize its conservative budgeting model, ensuring long-term fiscal discipline and protecting taxpayer interests.

Iowa’s FY 2026 Conservative Budget reflects a disciplined approach to governance that balances fiscal responsibility with economic growth. By aligning budget growth with taxpayer capacity and prioritizing sustainable tax policies, Iowa has established itself as a model for other states.

Introduction
Through a steadfast commitment to conservative budgeting, Iowa has shown that fiscally responsible government benefits all, creating an economic environment where prosperity and opportunity thrive.

Conservative budgeting requires the discipline to say “no” to the many competing demands for government funding—a challenging but essential approach to ensuring long-term fiscal health. Governor Kim Reynolds and the state legislature have championed this approach in Iowa, prioritizing responsible spending growth over government expansion.

This commitment to fiscal restraint has established Iowa as a national leader in conservative budgeting, resulting in a robust fiscal foundation, significant tax cuts, and substantial budget surpluses. Maintaining this conservative approach is crucial as Iowa approaches the Fiscal Year (FY) 2026 budget.

Iowa’s Success in Conservative Budgeting and Tax Reform
Governor Reynolds’s dedication to conservative budgeting and pro-growth tax reform has received national recognition.

The Cato Institute’s 2024 Fiscal Policy Report Card ranked her as the most fiscally conservative governor in the nation, highlighting her prudent budgeting choices and commitment to reducing tax burdens. Similarly, the Tax Foundation awarded her the Distinguished Service Award for her tax reforms, which have made Iowa’s economic landscape more competitive and inviting for businesses and individuals.

According to the Tax Foundation’s 2025 State Competitiveness Index, Iowa’s tax system now ranks 20th overall, a marked improvement reflecting recent pro-growth reforms. These changes include lowering income tax rates, eliminating the alternative minimum tax, removing federal deductibility, and beginning the state’s inheritance tax phaseout. In 2025, Iowa will have a single-rate (3.8 percent) income tax structure, making it even more competitive.

These tax changes might seem like abstract policies, but for everyday Iowans, they mean that more of their hard-earned income stays in their pockets. For example, moving to a flat tax allows everyone to pay the same rate, simplifying the system and making tax bills more predictable. This reform especially benefits small business owners and families who can now budget more confidently. Iowa’s transition from an inheritance tax also reduces burdens on family-owned businesses and farms, helping them remain in the family rather than being sold to cover tax expenses.

Building and Sustaining Iowa’s Fiscal Strength
Iowa’s conservative budgeting approach has strengthened the state’s fiscal foundation, with consistent budget surpluses, fully funded reserves, and a growing Taxpayer Relief Fund. In FY 2024, Iowa posted a budget surplus of $2.05 billion, projected to increase to $2.25 billion in FY 2025. These surpluses provide Iowa with a financial cushion, allowing the state to manage future uncertainties without resorting to sudden tax hikes or service cuts.

The Cash Reserve Fund and Economic Emergency Fund, Iowa’s primary reserve accounts, are filled to their statutory maximums, with a combined balance of nearly $962 million. This conservative approach to savings is akin to a family setting aside an emergency fund, ensuring financial stability even in times of crisis. Furthermore, Iowa’s Taxpayer Relief Fund, currently holding $3.7 billion and projected to grow to $4 billion by FY 2026, is a dedicated resource for reducing tax burdens on Iowans. This fund’s growth ensures that tax cuts can be sustained, benefiting Iowa families and small businesses directly by putting money back into the economy. While these funds are important in sustaining tax relief, too much money in the hands of the government means it is overtaxing the private sector and reducing economic growth and opportunity. The government should adopt even more conservative budgeting practices than the private sector does, as it is managing public funds rather than its own money, and therefore should prioritize spending less.

Using Population Growth Plus Inflation as a Spending Benchmark
Iowa’s conservative budgeting model limits General Fund spending growth to the rate of population growth plus inflation. This approach ensures that spending stays in line with the average taxpayer’s financial capacity, reflecting the state’s economic conditions and preventing abrupt expansions that could create future fiscal challenges.  By using this benchmark, Iowa keeps government growth aligned with what the average taxpayer can realistically support. Think of it like maintaining a household budget: if your income only increases by a small percentage each year, it would be unsustainable to double your spending.

Visualizing Iowa’s Conservative Budget Strategy
The following charts offer a clear picture of Iowa’s conservative budgeting. They show how the state has maintained fiscal discipline and aligned spending growth with population growth plus inflation in recent years.
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Figure 1 compares Iowa’s actual General Fund budget with different benchmarks, including a statutory spending limit and the proposed cap from Senate Joint Resolution 9 (SJR 9) in 2017. The proposed cap, which would have limited growth to 99% of estimated revenue or capped it at 4% above the previous year, ultimately did not pass. However, SJR 9 illustrates an important effort to restrain spending and maintain accountability. A better limitation that more closely resembles the budget passed in recent years and better matches the average taxpayer’s ability to pay for the budget is population growth plus inflation.

​Actual General Fund appropriations increased well below the statutory spending limit for most of the period. The budget would have increased slightly less in 2023 and 2024 under  SJR 9 than the statutory spending limit would provide, but the amount under SJR 9 would have been substantially too high. However, a spending limit based on the rate of population growth plus inflation during the previous calendar year before a legislative session would suggest $2.9 billion in cumulative overspending, resulting in less money in people’s pockets. This overspending means an average family of four spends $3,500 more on taxes and fees than they otherwise should be.
But this overspending was not for the entire period. Figure 2 illustrates the average annual growth of General Fund appropriations compared with the combined rate of population growth and inflation from 2013 to 2025. Since 2019, Iowa’s budget growth has consistently been less than this benchmark, ensuring that spending remains sustainable. This approach reflects the everyday budgeting principle of living within one’s means, balancing the budget without sacrificing essential needs.

​For FY 2026, Figure 3 shows that the Conservative Iowa Budget is set at $9.15 billion, representing a 2.7% growth rate, with state population growth up by 0.2% to 3,214,000 and chained consumer price index (CPI) inflation of 2.5% for 2024. By setting this limit, Iowa remains committed to aligning budget growth with taxpayers’ capacity, protecting against unchecked expansion (Iowa Budget Report FY 2026). This conservative threshold allows Iowa to continue operating on a strong fiscal foundation while keeping more money in the pockets of residents.

​These charts highlight Iowa’s disciplined budget strategy and demonstrate the benefits of adhering to conservative principles for fiscal stability.

Path to Tax Relief: Using Surpluses to Empower Iowans and Future Tax Relief
As a result of conservative budgeting, Iowa policymakers have been able to make historic income tax reductions. The Tax Foundation’s State Tax Competitiveness Index ranks Iowa 20th in the nation, a substantial improvement. Iowa was once ranked as one of the worst tax climates in the country, regularly residing in the bottom ten states and, in 2020, was ranked 44th in the Tax Foundation’s Index. Iowa’s tax climate is becoming more competitive due to pro-growth tax reforms made possible only by conservative budgeting.

Iowa’s budget surpluses have enabled the state to pursue significant tax relief initiatives. Moving toward a 3.8% flat income tax by 2025, Iowa is positioned to reduce this rate further, potentially eliminating the income tax soon. This path to tax relief is more than just numbers on a page; it translates to more financial freedom for Iowans. For a family, this could mean extra monthly money for essentials or savings for the future without paying an ever-increasing share to the government.

Although legislators may not seek to reduce the income tax during the 2025 legislative session, policymakers should stay active. Several policy options could be considered to ensure that the 3.8 percent flat tax continues to be lowered. Some of these include:

• Establishing a clear surplus trigger. Several states have used revenue triggers to lower income tax rates. North Carolina is one example. A revenue trigger can help lower rates but focuses on the wrong problem. The problem with the government is too much spending, so a surplus trigger incentivizes less spending under a strong spending limit while providing sustainable tax relief.
• Strengthening the state spending limitation: With a stronger state spending limit that could be based on population plus inflation or another metric such as limiting spending to 2.5 percent per budget year would allow for surplus dollars to be directed toward further tax rate reduction.
• Taxpayer Relief Fund: Iowa already has the Taxpayer Relief Fund, which was created for income tax relief. Dollars placed into the Fund should be constitutionally protected to ensure they are not “raided” for another purpose. The Taxpayer Relief Fund could be used to lower the income tax rate until it is eliminated. The House and Senate Ways & Means Committee chairs offered this proposal during the last legislative session.

These are just three potential policy options that policymakers could consider ensuring that the income tax rate continues to be lowered and eventually eliminated. During the last legislative session, Iowa Senator Jason Shultz offered policymakers a good reminder when he stated: “Both Republicans and Democrats need to realize that tax policy is affected by spending. And when you start seeing spending creeping up for annual, year after year, new good ideas, you can’t have good tax policy.”

By directing surplus revenue to tax relief instead of new government programs, Iowa’s approach respects the principle that taxpayers—not the government—should decide how to spend their earnings. This responsible budget approach keeps more money circulating in the local economy, promoting growth and empowering families and businesses.

Formalizing Spending Restraints
While Iowa’s conservative budgeting model has succeeded through voluntary adherence, formalizing a spending cap tied to a maximum of the rate of population growth plus inflation for state and local spending in the state constitution could secure these gains for future generations. Other states, like Texas and Colorado, have adopted similar limits with positive results, limiting government growth and protecting taxpayer interests.

A formal spending cap would function as a financial safeguard, ensuring that Iowa’s government lives within its means, similar to how a family might cap discretionary spending to avoid debt. Research from the Independence Institute underscores the importance of such fiscal restraints, showing that they can protect taxpayers and bolster state economies. For Iowa, adopting a constitutional spending cap would prevent future administrations from eroding the gains achieved through conservative budgeting and provide a steady check against excessive growth.

Conclusion: Iowa as a Model of Conservative Fiscal Responsibility
Iowa’s commitment to conservative budgeting has established it as a national leader in economic freedom and fiscal responsibility. Governor Reynolds has demonstrated the importance of not just conservative budgeting but also reforming government by reducing its size and scope. Through two major government reforms and reorganization laws, Governor Reynolds is working to reduce the influence the government has on taxpayers.

Going forward, policymakers should continue to build upon the governor’s efforts to reform state government. This includes improving legislative oversight and ensuring taxpayer dollars are not being wasted. Other beneficial steps to budget reforms include priority-based budgeting, independent efficiency audits, and routine evaluation of programs by legislative committees to see which ones should stay or go.

 Iowa has demonstrated that responsible budgeting benefits everyone by aligning budget growth with population and inflation, maintaining consistent surpluses, and dedicating funds to tax relief. The FY 2026 Conservative Iowa Budget, capped at $9.15 billion with a conservative 2.7% growth rate, reflects the state’s ongoing dedication to disciplined budgeting.

Iowa’s success is a blueprint for balancing fiscal responsibility with economic growth for other states facing budget challenges. By prioritizing taxpayer interests and limiting government expansion, Iowa has created an environment where economic freedom and opportunity can flourish.

References

• Americans for Tax Reform. “Sustainable Budget Project.” https://atr.org/budgetproject/
• Ginn, Vance. “Sustainable State Budgets Across the U.S.” https://www.vanceginn.com/letpeopleprosper/responsible-state-budgets-across-the-us
• Independence Institute. “Sustainable Colorado Budget to Help Eliminate State Income Taxes.” https://i2i.org/wp-content/uploads/IP-5-2023_d.pdf
• Iowa Legislative Services Agency. “Iowa Budget Report FY 2025.” https://www.legis.iowa.gov/docs/publications/FR/1456458.pdf
• Iowa Legislative Services Agency. “Iowa Budget Report FY 2026.” https://www.legis.iowa.gov/docs/publications/BL/1462973.pdf
• Iowa Senate Joint Resolution 9. “Senate Joint Resolution 9 (SJR 9) Text.” https://www.legis.iowa.gov/legislation/BillBook?ga=87&ba=SJR%209
• FEE. “Colorado’s Taxpayer Bill of Rights Should Be a Model for the Nation.” https://fee.org/articles/colorado-s-taxpayer-bill-of-rights-should-be-a-model-for-the-nation/
• Iowans for Tax Relief Foundation. “The 2025 Conservative Iowa Budget: A Plan for Continued Progress.” https://itrfoundation.org/the-2025-conservative-iowa-budget-a-plan-for-continued-progress/
• Tax Foundation. “2025 State Competitiveness Index: Iowa.” https://taxfoundation.org/statetaxindex/states/iowa/​