Temporary Or Permanent?
In the last two years, 21 states permanently cut personal or corporate income-tax rates, according to the Tax Foundation, and at least three others have called special sessions on tax cuts or will put the issue before voters this November. More than two-thirds of those states are led by Republican governors.
The vast majority of states that cut individual income taxes did so at the top: consolidating the highest brackets, decreasing the top marginal rate, or both. Several implemented or reduced an existing flat rate.
Only New York and Wisconsin -- both led by Democratic governors -- targeted lower or middle-income brackets. Many of the permanent changes will be phased in over several years, and some have guardrails that prevent cuts from taking effect if revenues or rainy day fund balances are too low.
Still, the biggest cuts are “likely to necessitate difficult budget choices in the future,” Fitch warned in October. And most states, said Lucy Dadayan, a senior researcher at the Urban Institute, haven’t announced a plan to offset the lost tax collections.
GOP States Slash Income Tax Rates | Most permanent tax changes benefit the highest earners
Among states offering temporary tax relief, five paused gas taxes, four suspended sales taxes on groceries and five called a holiday on many or all sales taxes at some point this year, with the measures evenly split among red and blue governors’ offices. A handful made those sales tax changes permanent.
Taxpayers in seven Democratic states and four Republican ones are set to receive one-time rebates, with another rebate in Massachusetts potentially on the horizon. Some states, like California, will send more money to lower-income households; others, like Georgia, are issuing flat rebates to all eligible taxpayers.
One-time injections have a limited impact on state budgets, Fitch’s D’Arcy said. But they also have a limited benefit for recipients, said Dadayan and Timothy Vermeer, an analyst at the conservative-leaning Tax Foundation.
A gas tax holiday, for example, may help a family save just $40 a month. A targeted rebate program would be more “prudent” to assist low-income families hit hardest by the pandemic, Dadayan said. Vermeer emphasized that permanent cuts yield longer and larger dividends.
Stimulus And Surpluses
While stimulus from Washington helped drive budget surpluses, the US aid can’t be used for tax cuts. Many Republican states are pushing back on that Treasury Department restriction in court, and rulings have so far been overwhelmingly in their favor. In the meantime, state budget officials insist that tax reform is born out of record revenue collections rather than federal aid.
“Absolutely no ARPA (American Rescue Plan Act of 2021) funds will be used to directly offset the potential tax cuts,” Arkansas Budget Officer Robert Brech wrote in a memo to the state’s governor last month about a proposal to accelerate personal and corporate income tax cuts passed in December. “Any indirect offset would be difficult to compute, if it exists.”
While states have not fully complied with federal restrictions on aid spending, Dadayan said, it’s difficult to pin down exactly where a given funding increase may have come from given the degree of excess liquidity in the past two years. The tax cuts, she added, “would have happened regardless” of aid.
--With assistance from Perry Cooper.
This article was provided by Bloomberg News.