- John Hendrickson is policy director of Iowans for Tax Relief Foundation.
- John Phelan is an economist with Minnesota’s Center of the American Experiment.
Iowa and Minnesota are Midwestern neighbors who have taken vastly different fiscal policy paths in recent years. They have arrived at quite different destinations, with one looking at lower taxes and a budget surplus and the other at higher taxes and a budget deficit. They illustrate the alternative policy paths from which the United States must choose.
In Iowa, Gov. Kim Reynolds has positioned Iowa as a national leader in fiscal responsibility. Along with the Legislature, she has prioritized conservative budgeting, leading to multi-year budget surpluses, full reserve funds, and a Taxpayer Relief Fund nearing $4 billion. These responsible practices enabled Iowa’s historic income tax reforms.
This is in complete contrast with Minnesota under the leadership of Gov. Tim Walz. Entering 2023 with a forecast budget surplus of $18 billion, Walz and the Democratic-controlled Legislature not only spent every penny of that — increasing spending, in real terms, by 23% per person since 2019 — but hiked taxes and fees by another $10 billion on top of that. This explosion of spending has now landed the state government with a forecast deficit of $5 billion for the 2028-2029 budget biennium.
These contrasting approaches are why Reynolds has been recognized by the Cato Institute as the most fiscally conservative governor in the nation, while Walz received the lowest ranking.
Conservative budgeting is at the heart of Iowa’s pro-growth income tax reforms. The Hawkeye State once had some of the highest income tax rates in the nation, but, since 2018, Reynolds has made tax reform a priority.
Iowa’s progressive income tax with the top rate of 8.98% was one of the highest in the nation, and the top corporate rate of 12% was the highest. Now, Iowa has a flat 3.8% income tax and a 7.1% corporate tax, which is scheduled to be reduced further until it reaches a flat 5.5%. Reynolds has stated that income tax reform is far from over and seeks further rate reductions.
Fiscal conservatism has strengthened the state’s budgetary foundation, while still allowing it to meet spending priorities. In fiscal year 2024, Iowa posted a budget surplus of $2.05 billion, projected to increase to $2.25 billion in fiscal year 2025. Further, 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. Iowa’s Taxpayer Relief Fund currently holds $3.7 billion.
Reynolds has also made reforming and reducing the size and scope of government a priority. The Legislature passed the first major reforms to state government in nearly 40 years, reducing the number of executive-level agencies from 37 to 16. Numerous boards and commissions are also being reviewed and will either be eliminated or consolidated. This is making government more efficient and reducing bureaucracy. In less than 18 months taxpayers saved about $130 million as a result of the reforms and additional savings are expected as the process continues.
Walz, meanwhile, inherited some of the highest tax rates in the Unites States — a 9.85% top rate of income tax and 9.80% for the corporate tax, now the highest in the nation — but has worked, with Democrats in the Legislature, to increase them, with measures such as a top rate of income tax of 12.5%, which would be the highest in the country, and the imposition of a “Global Intangible Low Tax Income” burden on companies.
He has expanded the size and scope of government. A new Paid Family and Medical Leave scheme, for example, imposes a tax of 0.7% on each worker, but a state commission found that this will need to increase by 23% in four years to keep the scheme solvent. It micromanages employment relations across the state and requires the hiring of hundreds of new state employees.
Because of this fiscal incontinence, the state is forecast to see a budget surplus of $616 million at the end of the 2026-2027 biennium turn into a deficit of $3.5 billion in 2028-2029, or $5.1 billion if inflation is factored in. Budget battle lines are already being drawn in St. Paul.
As the United States faces mounting fiscal pressures from increasing deficits and rising interest rates, Iowa and Minnesota offer examples of the drastically different choices policymakers in Washington could make. Do they follow Reynolds’ path of fiscal conservatism to lower taxes and balanced budgets? Or Walz’s path of higher taxes, higher spending, and higher deficits?
John Hendrickson is policy director of Iowans for Tax Relief Foundation. John Phelan is an economist with Minnesota’s Center of the American Experiment.
Iowa Governor Kim Reynolds and Minnesota Governor Tim Walz have taken different approaches to fiscal policy, with Reynolds advocating for tax cuts and smaller government while Walz focuses on investing in education and infrastructure.
Reynolds, a Republican, has pushed for tax cuts and deregulation as a way to spur economic growth in Iowa. She has also focused on reducing government spending and streamlining government operations. Reynolds believes that lower taxes and less government intervention will attract businesses and create jobs in the state.
On the other hand, Walz, a Democrat, has prioritized investing in education, healthcare, and infrastructure in Minnesota. He has proposed increasing funding for public schools and expanding access to affordable healthcare. Walz believes that investing in these areas will improve the quality of life for all Minnesotans and help the state remain competitive in the global economy.
The contrasting fiscal paths of Reynolds and Walz highlight the different priorities and philosophies of the two governors. While Reynolds believes in smaller government and lower taxes, Walz is focused on investing in public services and infrastructure. It remains to be seen which approach will lead to greater economic prosperity and quality of life for their respective states.
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Kim Reynolds, Tim Walz, fiscal policy, budget plans, economic strategies, contrasting approaches, government spending, tax policies, state budgets, financial decisions
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