Prudent governance that puts taxpayers first embodies sound fiscal policy. Policymakers looking to turn excess revenue into long-term tax relief should look to Iowa and its Taxpayer Relief Fund (TRF) for a potential solution.
The TRF is a constitutionally protected account that captures surplus revenue and reserves it for tax relief. Originally created in 2011 as the “Taxpayer Trust Fund,” it was reformed in 2018 to become the TRF and give legislators greater flexibility in how to return the money to taxpayers.
Unlike a traditional rainy-day fund, which supports government spending during downturns, the TRF is dedicated exclusively to cutting taxes or issuing rebates. It now serves as a fiscal engine powering Iowa’s multi-year tax reform effort, which has transitioned Iowa from a progressive income tax code with a top rate of 8.53% in 2019 down to a flat 3.8% income tax rate 2025.The TRF has proven to be an effective mechanism for facilitating tax cuts, so much so that lawmakers in other states are looking to adopt their own version.
Each fiscal year, Iowa budget officials compare actual tax revenue collected to forecasts made by the Revenue Estimating Conference. Lawmakers then pass a budget and post no more than 99% of projected revenue. If revenue collections exceed projections, the surplus is deposited into the Relief Fund after the books close. As of January 2025, the TRF holds a balance of $3.7 billion. That is a large sum of money that keeps extra revenue available for taxpayers instead of fueling additional government spending in the general fund. Since 2018, Iowa has collected an average of $5 billion a year in total income taxes. Yet, the TRF continues to grow despite rate reductions; clear evidence that Iowa’s tax relief strategy is working without compromising fiscal stability.
Only under certain circumstances can TRF dollars be transferred into the budget to fund appropriations. The recent FY 2026 budget included the use of $463.6 million from the TRF to support the ongoing shift to a flat tax. In the context of using the fund to smooth out budget swings from changes to the tax code, it is a necessary step.
However, groups such as Iowans for Tax Relief are rightfully wary that it could set a dangerous trend of using excess taxpayer dollars as limitless spending invitations. Their message is clear: “Maintain conservative budgeting and resist unsustainable spending growth.” While ITR broadly supports flat tax reform and the notion of using the TRF wisely, they caution against using taxpayer-owned reserves as flexible spending sources.
Other states with strong surpluses and a commitment to fiscal restraint can replicate the TRF model by following its lead. Conservative spending caps and a dedicated surplus fund help states avoid the trap of spending windfalls. Codified fiscal discipline protects the interests of citizens when an inevitable spending debate rages during budget negotiations.
Iowa’s Taxpayer Relief Fund proves that excess revenue doesn’t have to mean excess government. With a few smart policy choices like spending discipline, transparent surplus management, and a commitment to taxpayers, states can turn short-term surpluses into long-term prosperity. Legislators looking for a roadmap don’t need to reinvent the wheel. Iowa has already shown the way.
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Author: Landon Epperson
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