Iowa legislators will need to start making some difficult choices when they return to Des Moines in January. 

That might seem like a strange prediction after voters returned solid Republican majorities to both the Iowa Senate and House, effectively ratifying lawmakers’ most controversial decisions of the past two years, including a strict abortion ban, tax cuts and private school vouchers.

But things will be different on the money front this year, because the Legislature must now decide how to spend an ever-shrinking pot of money.

It is no understatement to say that state government has been flush with money for several years. That’s largely because of all the federal COVID money sent directly to the state and local governments and the stimulus payments to businesses and individuals who wound up paying more state income taxes as a result. 

But it’s also because Iowa lawmakers have been tightfisted when it came to spending on services like public education, health care, conservation and recreation.

None of this comes as a surprise to lawmakers, who prioritized tax cuts in recent years and, instead of spending on public projects, created a healthy pot of cash reserves. 

Spent wisely, those reserves can carry the state for many years. But spending decisions become increasingly difficult when there is growing competition for a shrinking pot of money.

Choices will only get tougher as Republican leaders push for new cuts in property taxes and the elimination of Iowa’s income tax, which Gov. Kim Reynolds has high on her priorities list.

As things stand now, Iowa’s tiered income tax tables reset on Jan. 1 from a top rate of 5.7% to a flat rate for everyone of 3.8%. At the same time, Iowa’s inheritance tax disappears in 2025, and the franchise tax will reset from 4.4% to 4.1%.

Those and other changes will lower state tax collections by about $600 million, or about 6.4% during the budget year that begins July 1, 2025, according to a recent report by the Iowa Revenue Estimating Conference.

State government currently has reserves of about $5 billion, mostly as a result of federal COVID spending. So, if nothing else changes, there is enough in the bank to cover current spending levels well into the future. 

But things will change. At least Reynolds wants them to change. She has said repeatedly that she wants to eliminate Iowa’s personal income tax. 

That would produce seismic changes, because unlike states that don’t have an income tax — Alaska, Texas, Nevada and Florida — Iowa does not have a fallback source of revenue. (Alaska and Texas rely on energy taxes from oil and gas production; Nevada and Florida are supported by tourism.) 

This year, Iowa’s personal income tax is expected to raise about $5.5 billion. Starting next year, when the lower flat tax rate of 3.8% takes effect, income tax receipts are projected to drop to $4.8 billion. 

Eliminating the income tax entirely would reduce Iowa’s total revenue by about half. 

Of course, any effort to do that would have to include alternative sources of revenue. The most logical source is the state sales/use tax, which is expected to generate about $4.4 billion, a billion dollars less than the income tax in 2025. 

To oversimplify, each penny of Iowa’s 6-cent sales tax generates about $730 million of revenue. Boosting Iowa’s sales tax by 3 cents would bring in an additional $2.2 billion, which would leave state coffers with $2.2 billion less, an amount that would consume Iowa’s cash reserves in less than three years.  

That’s such a dire situation that it’s safe to assume lawmakers will kick the idea of eliminating the income tax down the road for now. 

But they will still have to deal with slowly shrinking revenues because of the tax cuts put in place last year and the year before.  

So schools, health care, nursing homes, public safety, parks and recreation, conservation efforts and just about everything else the state does with its $9 billion budget today will be on the table for substantial cuts, if not elimination.