The money is needed "for their salaries, and the logistics and the transportations for these efforts against Daesh," said Hemin Hawrami, foreign policy advisor to the Kurdish Regional Government President Massoud Barzani, using the Arabic acronym of the group.
Hawrami, who spoke at the Washington Institute think tank, said the KRG is unable to provide basic needs for the Peshmerga such as food and winter clothing, nor have the salaries of fighters been paid since September.
"We don't have that" he said. "The amount we can generate in Kurdistan region is $500 million. That's it for everything," he said of the total funds of his government.
He stressed that the Peshmerga could defeat the IS if the KRG would receive financial assistance from the U.S., which has responded in a "positive" manner to the issue. Hawrami envisions the Peshmerga as building a force to confront regional issues.
"We want Kurdistani Peshmergas to outgun Daesh. Up to this moment, if you take away the airstrikes, still Daesh is outgunning the Peshmergas," he said. "Why Peshmergas should not have tanks? Why Peshmergas should not have enough quantities of the anti tank missiles," he said.
Hawrami believes the IS can be defeated on the ground and said Peshmerga fighters were the only ground forces that proved able to beat the militants and clear areas.
"Daesh has not been able to take back one meter of the areas that Peshmerga forces have cleared," he said.
Though the group has fought alongside Iraqi security forces, Peshmerga forces complain of not having similar equipment of the Iraqis.
A spokesman for the Iraqi embassy in the U.S. told Anadolu Agency that Baghdad has never withheld U.S. military aid to the Peshmerga.
"We continue to provide military and logistic support to all Iraqi forces that are battling Daesh including the Peshmerga," said Ali Al-Mawlawi, adding that the U.S. understands the "importance of respecting Iraq's sovereignty," and coordinated with Baghdad any provisions of military aid.
Military aid aside, there exists political differences between Iraq's central government and the KRG.
A referendum will be held in the second half of 2016 to determine if the people of the Kurdistan region want separation from Iraq's central government, according to Hawrami.
Dictatorship and federalism has failed to find a solution between the Iraqi government and the KRG for more than 40 years, he said, and holding a referendum was "a new formula" for a peaceful solution.
"This new formula must be based on peaceful ways on dialogue ways and negotiations, talks with Baghdad," he said.
He acknowledged that it was not clear how the voting process on the referendum was going to take place because parts of northern Iraq is besieged by the IS, where Iraqi citizens live.
Responding to Hawrami, embassy spokesman al-Mawlawi said that all political parties could express their political aspirations, but "the central government has a fundamental obligation to uphold the constitution".