Iowa’s budget basics

According to the National Association of State Budget Officers (NASBO), Iowa’s total expenditures in fiscal year (FY) 2020 were $24.2 billion, including general funds, other state funds, bonds, and federal funds. NASBO reported that total expenditures across all states in FY 2020 were $2.3 trillion, ranging from $4.7 billion in Wyoming to $337.7 billion in California.

Each state allocates spending and taxes differently among different levels of governments, and local governments often administer programs with state funds, so combined state and local government data show a more complete picture of individual benefits and contributions when comparing states.

Per the US Census Bureau, Iowa’s combined state and local direct general expenditures were $32.2 billion in FY 2018 (the most recent year census data were available), or $10,239 per capita. (Census data exclude “business-like” activities such as utilities and transfers between state and local governments.) National per capita direct general expenditures were $9,801.

Iowa’s largest spending areas per capita were elementary and secondary education ($2,173) and public welfare ($1,973). The Census Bureau includes most Medicaid spending in public welfare but also allocates some of it to public hospitals. Per capita spending is useful for state comparisons but is an incomplete metric because it doesn’t provide any information about a state’s demographics, policy decisions, administrative procedures, or residents’ choices.

Iowa’s combined state and local general revenues were $35.4 billion in FY 2018, or $11,243 per capita. National per capita general revenues were $10,071. Iowa uses all major state and local taxes. Iowa’s largest sources of per capita revenue were charges ($2,495), such as state university tuition and highway tolls, and federal transfers ($2,055).

Iowa’s politics

Governor Kim Reynolds, a Republican, was elected in 2018 with 50 percent of the vote. The next gubernatorial election is in 2022.

Republicans control both the House of Representatives (59 Republicans to 41 Democrats) and Senate (32 Republicans to 18 Democrats). Control of the governor’s mansion and each house of the legislature gives Republicans a trifecta in Iowa. All Iowa House seats are on the ballot in 2022 because representatives serve two-year terms. Senators serve four-year terms; roughly half the senatorial seats are on the ballot in 2022, and the other half will be up for election in 2024.

Iowa’s budget institutions, rules, and constraints

Iowa uses an annual budget. The legislature is not required to pass a balanced budget, but the governor is required to sign one. Deficits may be carried over into the following year. Iowa also has an appropriations formula that limits spending growth, but the limit may be overridden by a simple legislative majority. There are also limits on total authorized debt incurred by the state but not debt service.

(Note: Some states have informal budget institutions that constrain overall spending growth or a specific expenditure’s growth.)

Iowa’s recent fiscal debates

• Iowa passed significant tax legislation in 2018 that was both in response to the Tax Cuts and Jobs Act (TCJA) and a large tax cut in its own right. The legislation changed the state tax code to largely conform with the TCJA’s federal changes and reduced individual income tax rates in each of Iowa’s nine brackets, including dropping the top tax rate (on taxable income above roughly $73,000) from 8.98 percent to 8.53 percent. Further, the law set additional tax changes to trigger if the state hits revenue targets in future years; these include reducing the nine brackets to four and dropping the top rate to 6.5 percent. (The earliest those changes could happen is fiscal year 2023.) The legislation also lowered the corporate tax rate from 12 percent to 9.8 percent (beginning in fiscal year 2021), expanded the state’s sales tax base to include more services (including digital services, ridesharing services, and online marketplace sales), and changed to several business tax credits. The Iowa Department of Revenue estimated that if the revenue targets are met and the additional tax changes are triggered, the legislation would reduce revenue by $100 million in FY 2019, $329 million in FY 2021, and $642 million in FY 2024.
  
• Iowa considered adding work requirements to Medicaid eligibility in 2019, but legislators could not agree on specifics (in part because federal courts struck down similar efforts in other states). But some lawmakers want to try again in 2020. This is not the state’s first attempt at Medicaid reform: When Iowa first expanded Medicaid under the ACA, it received a waiver from the federal government to enroll newly eligible residents in Marketplace coverage. The state ended its “private option” and returned to the traditional expansion program in 2015. That same year, however, then-governor Terry Branstand shifted management of the state’s Medicaid program to private companies. The shift and its resulting savings (or lack thereof) remains controversial in the state.

Iowa’s current budget

Governor Reynolds released her FY 2021 budget proposal in January 2020. The budget proposal included $8.1 billion in general-fund spending, an increase of 4 percent from FY 2020. The proposal focused primarily on education and the governor’s tax reform plan to increase the sales taxes and decrease income taxes.

Iowa enacted its FY 2021 budget in June 2020. The enacted budget included $7.8 billion in general fund spending, a $300 million decrease from the governor’s proposal and a 1 percent decrease from FY 2020 spending. The enacted budget left a budget surplus of $311 million. It did not include the governor’s tax plan, though. Iowa used most of its federal CARES Act funds to support its Unemployment Insurance Trust fund.

Governor Reynolds released her FY 2022 budget and gave her State of the State address in January 2021. In the speech, the governor acknowledged that the state faces a challenging fiscal environment but, because of previous spending cuts and reserves, said, “we aren’t looking at tough budget cuts and we’re certainly not looking at raising taxes.” The governor dropped her push for new income tax cuts because of the pandemic, but she also called for speeding up previously passed income tax cuts by removing “tax triggers” that require Iowa to hit revenue targets before those cuts take effect. The governor’s budget proposes $8.1 billion in general-fund spending for FY 2022, a sum larger than for FY 2021 enacted spending but roughly equal to what she proposed for that fiscal year before the pandemic.

For more on Iowa’s budget, see

• the Iowa Department of Management and
  
• Iowa Legislative Services.

Iowa’s economic trends

Iowa’s per capita income (per the Bureau of Economic Analysis) was $55,218 in 2020, ranking 27th among the states. It was below both the national average of $59,729 and the Plains regional average of $56,321. The state’s median household income (five-year estimate) was $60,523 in 2019, ranking 26th among the states and below the national average of $62,843. Iowa’s poverty rate was 11.5 percent in 2019 (five-year estimate), below the national rate of 13.4 percent.

Although Iowa’s averages tell a story about the entire state, Iowa is composed of diverse localities. For example, the city of Fort Dodge’s median household income was $40,886, and its poverty rate was 16 percent; the city of Johnston’s median household income was $96,948, and its poverty rate was 4.1 percent.

Iowa’s unemployment rate has historically been below the national average, particularly following the Great Recession, and in recent years it has been among the lowest in the country. (See how COVID-19 is affecting state employment and earnings data.)

Unemployment rates (like other economic indicators) often vary significantly by race and ethnicity. However, Iowa does not have enough Black or Latino residents for the Bureau of Labor Statistics to break down its unemployment rate by race.