State governments are still flush with cash from federal COVID-19 aid dollars and increased revenues. And more than half are considering using those budget surpluses to institute or accelerate tax cuts for residents.
At least 27 states are considering some kind of personal income tax cut, according to the Institute on Taxation and Economic Policy (ITEP), a left-leaning think tank. The proposals vary, from cutting existing top tax rates to accelerating tax cuts that have already been approved (Georgia, for example, is considering fast-tracking tax cuts that will take effect next year).
Still other states, including Kansas, Michigan, Minnesota, Vermont, and Wisconsin, are debating exempting some retirement income from being taxed. In North Dakota and Ohio, there are discussions about transitioning from graduated income taxes to flat rates. And at least a dozen states are proposing property tax cuts.
These tax cut proposals are a continuation of the income tax cuts and credits and rebates that many state governments instituted over the past two years.
States rainy day funds have never been better stocked, and many states are running large surpluses, writes the Tax Foundation.
Some statesincluding Arkansas, Indiana, Louisiana, Mississippi, and West Virginiaare even seeing movements to completely eliminate their state income tax. Currently, nine states have no personal income tax, including Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Though the cuts have been heralded by the Tax Foundation, the ITEP finds them short-sighted. The organization notes that states with low income taxes make up the money elsewhere, often with increased excise and sales taxes, which hit low-income residents harder than wealthier taxpayers, and higher property taxes.
In fact, a report by the Urban-Brookings Tax Policy Center found that in all 11 states that cut individual income tax rates in 2022, the largest direct benefits went to the highest earning households.
These cuts would put state finances in a precarious position and further erode public investments in education, transportation, and health, ITEP writes, noting that while state budgets might be doing well now, that wont always be the case. Cutting taxes because of a short-term windfall has long-term effects.
At some point, perhaps soon, the economy will turn, and states that passed bigger, permanent tax cuts will face tougher fiscal choices because of those tax cuts, Richard Auxier, senior policy associate at the Tax Policy Center, wrote.
Of course, while many state lawmakers are proposing tax cuts, many will remain just that.
Some states propose wealth taxes, expanded credits
On the other end of the spectrum, at least seven states are interested in instituting wealth taxes on their richest residents. In New York, for example, one proposal would levy an additional state income tax on the long-term capital gains of New Yorkers with state taxable income of at least $400,000 for individuals and $500,000 for couples.
At the same time, many states have also taken steps to expand or improve certain credits, like the Child Tax Credit (CTC).
The CTC was significantly expanded at the federal level in 2021, and with it came immediate reductions in child poverty and household food insecurity. When the expansion was not renewed last year at the federal level, several states created a version of the CTC on their own.
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