Even as the U.S. economy shows signs of slowing down, many states around the U.S. are flush with cash, with their so-called rainy day funds estimated to reach a record high of $136.8 billion this fiscal year. And lawmakers in more than half of states are responding to their new cash cushions with similar proposals: cutting taxes.
Twenty-seven states are weighing tax cuts this year, according to a recent analysis from the left-leaning Institute on Taxation and Economic Policy (ITEP), which termed the push “tax cut fever.” Some officials are considering totally eliminating their state income tax, including in Mississippi and Arkansas, while others are floating property tax cuts, among other ideas.
The drive to cut state taxes has accelerated during the pandemic. During the past two years, dozens of states reduced their income tax rates or created new tax credits and rebates, partly as their coffers overflowed due to strong economic growth and billions in federal pandemic aid. Yet the latest round of tax cuts comes as the economy is showing signs of stress, raising questions about timing.
“Times are good now, but if there’s a downturn, what will their response be?”” said Richard Auxier, senior policy analyst at the Tax Policy Center who focuses on state and local tax policy. “Will it be cutting spending on education? And if it’s raising taxes, who will be impacted?”
The current tax cut proposals range from small reductions in states’ income tax rates to getting rid of the individual income tax altogether, as Mississippi Governor Tate Reeves, a Republican who is running for reelection this year, has proposed.
Other states are examining more targeted measures, such as exempting more retirement income from taxation — a move that would benefit older residents but potentially take away revenue that could be used for younger families, ITEP noted.
To be sure, some of these proposals are simply that: ideas floated by lawmakers and governors that may face a long path to becoming law. In some states, the tax cut plans are further along, such as in North Dakota, where lawmakers are weighing a bill that would eliminate the individual income tax for single filers making $44,725 or less and for married filers making $74,750 or less, according to the Bismarck Tribune.
Tax cut rationale: The good, the bad and the ugly
State lawmakers say they are proposing tax cuts for a number of reasons: To make their states more economically competitive with others; to boost economic growth; or to boost taxpayers who are struggling with inflation.
But Auxier said voters should examine whether these tax strategies match up with lawmakers’ objectives, noting that the cuts might not actually accomplish their stated goals.
For instance, reductions in income tax rates are often portrayed as helping put money back into ordinary workers’ pockets. Yet in the 11 states that cut individual income tax rates in 2022, the biggest direct benefits were enjoyed by the highest-earning households, Auxier’s analysis found.
By comparison, lower- and middle-income households received only a modest or no benefit. The reason: Higher-income households pay the most in taxes, while some low-income households pay no taxes. That means a tax cut wouldn’t provide those individuals with any benefit.
“If you say, ‘My goal is to give back money to the people who pay the most taxes,’ then the income tax cut works,” Auxier told CBS MoneyWatch. “I don’t like when they say, ‘I want to pass a tax cut for regular working class people’ — nope, it doesn’t work that way.”
Some states weighing whether to scrap their income tax entirely say it will make them more attractive to businesses and households from other states. In Mississippi, Reeves said eliminating taxes would help the state — one of the poorest in the U.S. — “become more competitive economically with Texas, with Florida, with Tennessee.”
But Mississippi, which US News & World Reports ranks 50th on health care and 49th on its economy among all 50 states, may need far more than a tax cut to compete with Florida or Texas — which rank No. 8 and No. 9 in terms how well residents are doing — Auxier noted.
“I get really nervous when people in Mississippi and West Virginia start saying, ‘We have lot of problems, and I’m looking at Florida and Texas and they don’t have an income tax and they are doing great — that’s what we have to do’,” Auxier said. “If you think the only difference between Mississippi and West Virginia and Florida and Texas is income taxes, I don’t think you are doing enough research.”
Businesses generally rank other issues higher than taxes when deciding where to locate, experts say. For instance, they’ll point to the need for a pool of qualified workers, good schools for their employees’ children and good roads and transportation to get employees to work.
“Be careful before you eliminate your state’s ability to generate revenue,” Auxier noted.
Targeted tax relief
Other states are focusing their tax cuts on specific groups, such as 10 states that last year created or expanded a Child Tax Credit or Earned Income Tax Credit, which is geared toward low-income families. Some states this year are focusing on older residents, with tax reductions for retirement income, such as Vermont, Wisconsin and Minnesota.
These cuts are typically less fiscally costly than a wholesale reduction of the income tax rate, which makes them more affordable — and gives a state more fiscal flexibility in a downturn, Auxier added.
One example of tax cuts backfiring — the Kansas experiment of 2012. That year, lawmakers in the state slashed income tax rates on top earners by almost 30%, while some businesses had their taxes reduced to zero, under the theory that lower taxes would help spur economic growth.
But Kansas underperformed its neighboring states on an economic basis, according to the Center on Budget and Policy Priorities. And with less state revenue, Kansas was forced to cut spending on education and other services. Eventually, the tax cuts were reversed by lawmakers.
Here are the 27 states where lawmakers or their governors are considering tax cuts in 2023.
Newly inaugurated Governor Sarah Huckabee Sanders, a Republican, is pledging to eliminate the state’s individual income tax, although she said she will start with tax cuts. Her rationale: “We will no longer surrender our jobs, our talent, our businesses and our economic might to states like Tennessee and Texas that have no income tax.”
“I will work with lawmakers to pass an income tax cut this year – and we must keep cutting it, no matter how long it takes, until we eventually wipe the income tax off the books,” Sanders said in her January inauguration speech.
Arkansas’ economy ranks 41st out of the 50 states, according to U.S. News & World Report.
Governor Jared Polis, a Democrat, is pushing for $200 million in property tax relief this year, according to the Colorado Sun. That comes after voters last fall approved a cut that reduced the state’s flat income tax rate to 4.4% from 4.55%.
The state has a 3% personal income tax on the first $10,000 of earnings for single workers (and up to $20,000 for married filers), and a 5% rate for income up to $50,000 for single taxpayers and $100,000 for married filers. Governor Ned Lamont, a Democrat, is proposing cutting those rates to 2% and 4.5%, respectively, starting in 2024.
Governor Brian Kemp, a Republican, wants to give $1 billion in income tax rebates to residents, which he describes as inflation relief, according to WSB-TV. He’s also proposing an additional $1 billion in property tax relief grants.
Idaho, which last year lowered its personal and corporate tax rate and created a tax rebate of $300 per person, wants to provide more relief in 2023, Governor Brad Little, a Republican, said in his 2023 state address. Little is pledging $120 million in property tax relief this year.
Lawmakers in the state say they want to prioritize property tax cuts in 2023, as well as potentially cut individual tax rates even further, according to WISH-TV. That would come after the state approved lowering its personal income tax rate from 3.23% to 2.9% over seven years.
Lawmakers are focusing on lowering property taxes in 2023 after Governor Kim Reynolds signed a law last year to introduce a flat tax of 3.9% and eliminate brackets for higher-income residents.
“So I think what you’re going to see us looking at this year is more of, how do we help bring down some of these levies, but at the same time, how do we make sure that there’s a level of accountability so Iowans see this property tax relief?” said Pat Grassley, the Republican House speaker, according to The Gazette.
Both Democrats and Republicans in Kansas want to provide more tax cuts in 2023, although they disagree about how to go about it, according to the Kansas City Star.
Kansas Governor Laura Kelly, a Democrat, wants to eliminate sales taxes on food, diapers and feminine hygiene products as well as cut income taxes on Social Security, among other approaches. Meanwhile, Republican lawmakers are pushing to introduce a flat income tax rate for state residents.
Lawmakers have introduced a bill that would accelerate tax cuts and lower the individual income tax to 4.5% in 2023 and to 4% in 2024. Currently, the state’s tax rate is a flat 5%.
Some state lawmakers want to eliminate its personal income tax, with state Rep. Richard Nelson, a Republican, suggesting offsetting the loss of income taxes with changes to sales and property taxes. Louisiana’s graduated individual income tax now ranges from 1.85% to 4.25%, according to the Tax Foundation.
“My concept is really you’re going to package those changes with eliminating income tax and some of these other non-competitive taxes,” Nelson said, according to BRProud.com.
On February 3, Governor Gretchen Whitmer, a Democrat, and other Democratic state lawmakers proposed a set of tax cuts, including a $180 tax rebate for every tax filer, according to Click on Detroit.
The plan would also eliminate a retirement tax of 4.25% and expand a match of the federal Earned Income Tax Credit, which is aimed at low- and middle-income families.
Lawmakers in Minnesota, one of only 12 states that taxes Social Security income, are proposing to eliminate the tax. That would impact more than 400,000 tax filers, who would see a tax reduction of $1,200, according to CBS Minnesota.
As mentioned above, Mississippi Governor Tate Reeves is seeking to eliminate the state’s personal income tax, which currently is a graduated tax ranging from 4% to 5%.
That would come after Reeves signed a law last year to reduce individual tax rates, with the 5% tax rate gradually declining to 4% for fiscal year 2026, according to the Clarion Ledger.
Fresh off $800 million in tax cuts that were signed into law in 2022, Missouri House Speaker Dean Plocher, a Republican, said in January that the state’s $6 billion surplus should be used to send more money back to taxpayers.
Plocher didn’t provide specifics, but said he is interested in cutting income taxes and sales taxes, as well as making changes to property taxes, according to the Missouri Independent.
With a $2.5 billion surplus, state lawmakers are moving forward with a billion-dollar tax rebate that would send $1,250 in rebate checks to taxpayers. The bill would also green-light property tax rebates of $500 per homeowner, the Montana Free Press reported in January.
However, Governor Greg Gianforte, a Republican, last month called for even bigger property tax rebates, at $2,000 per taxpayer.
“We want to provide Montana homeowners with $2,000 in property tax rebates over this year and next, and permanent, long-term income tax cuts,” he said at a January press conference.
Governor Jim Pillen, a Republican, and state lawmakers in January jointly proposed a number of bills that would reduce tax rates. For instance, one bill would cut its highest individual income tax rate form 6.64% now to 5.84% by tax year 2027.
Another bill proposes exempting all Social Security income from taxation. Currently, the state exempts 60% of Social Security benefits from taxes.
Governor Michelle Lujan Grisham, a Democrat, in January announced a plan to send tax rebates to residents. The legislation proposes making $750 payments to individual taxpayers or $1,500 for those filing jointly, with the goal of helping residents struggling with inflation.
Some lawmakers want to cut personal tax rates to compete with states without individual tax rates. Senate President Pro Tempore Phil Berger, a Republican, last month said he wants to cut the individual income tax rate to 2.5%, according to the Charlotte Business Journal.
The state income tax rate is already getting a cut in 2023, thanks to earlier legislation. The tax rate this year is 4.75%, down from 4.99% previously, and it will decline to 3.99% in 2026.
Lawmakers in North Dakota are weighing a proposal that could eliminate the individual income tax for low- and middle-income earners. People earning less than $44,725 and married filers earning less than $74,750 wouldn’t pay taxes under the proposal, while higher-earning households would have a flat tax of 1.5%.
A flat income tax is on the agenda for lawmakers in 2023, according to the Columbus Dispatch. Currently, the state has a graduated tax that ranges from 2.77% to about 4%, the Tax Foundation notes.
Flat taxes ultimately benefit the highest-earning households, according to ITEP, which said its research found that all households except the top 20% paid a higher tax rate on average in flat-tax states compared with those in graduated tax states.
Governor Kevin Stitt, a Republican, said in his state address earlier this month that he wants to cut taxes, according to Fox25.
“In my executive budget I am proposing to eliminate Oklahoma’s state grocery tax and reduce our personal income tax rate to 3.99%,” Stitt said. The state has a graduated individual income tax that ranges up to 4.75%, according to the Tax Foundation.
The state last year passed an income tax reduction, reducing the top income tax rate from 7% to 6.5% and condensing the number of income brackets to three from six, according to the Post and Courier.
Governor Henry McMaster, a Republican, said in his January state address that he’d like to speed up the tax cuts.
“Should an increase in future revenues allow, I ask the General Assembly to use additional funds to speed up the income tax cut schedule, so taxpayers can keep even more of their hard-earned money,”
Utah Governor Spencer Cox, a Republican, is proposing cutting the state’s current income tax rate from 4.85% to 4.75%, according to KSL.com. He also wants to use the state’s budget surplus to send checks of at least $100 to households and provide a one-time property tax rebate.
Governor Phil Scott, a Republican, highlighted some possible tax cuts in his fiscal year 2024 budget address last month. Among them: getting rid of taxes on veteran pension benefits, which the AARP calls “long overdue,” and expanding its exemption on taxes for Social Security income.
Vermont, one of 12 states that taxes Social Security income, exempts earnings from the program of up to $25,000 per single taxpayer or $32,000 for married couples. Under Scott’s plan, that would be expanded by $15,000.
Governor Glenn Youngkin, a Republican, in December proposed a new budget with an additional $1 billion in tax cuts, according to the Virginia Mercury. That would follow on last year’s $4 billion in tax cuts for state taxpayers.
Among his proposals is cutting the state’s top personal tax rate to 5.5% from 5.75% — a change that would impact most taxpayers since it applies to incomes over $17,000.
Governor Jim Justice, a Republican, proposed what he describes as “the largest tax cut in West Virginia history” in his state address last month. His plan would reduce personal income taxes by 50% over three years, beginning with a 30% cut in June 2023 and two additional 10% cuts in the following two years.
Wisconsin Governor Tony Evers, a Democrat, proposed cutting taxes for middle-class households in his state address last month, according to PBS Wisconsin. However, Republicans are pushing for a flat-tax plan that would reduce taxes for the highest-earning households and introduce a flat 3.25% rate in four years, the publication noted.
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