Cash-rich states cut taxes amid windfall revenue

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And this year, at least a dozen states have made cuts or are considering cuts, including temporary and permanent measures, according to the Tax Foundation.

While there have been pushes for corporate or property tax relief, income taxes are “the heart of what’s going on,” said Richard Auxier, senior policy associate at the Urban-Brookings Tax Policy Center.

“Overall, most tax cut proposals have been relatively modest, and a number have been targeted,” said Brian Sigritz, director of state tax studies at the National Association of Tax Officers. state budget.

“Overall, most tax cut proposals have been relatively modest, and a number have been targeted.

Brian Sigritz

Director of State Tax Studies at the National Association of State Budget Officers

“The targeted proposals we see are aimed at helping to deal with the impacts of the pandemic and inflation,” he said.

For example, some of these included changes to groceries taxes, pension benefit levies, earned income credits, relief for small businesses, suspension of gasoline taxes , etc

Annual inflation rose 7.9% in February, a new high in 40 years, according to the US Department of Labor, measuring the costs of food, gasoline, housing and more.

And “very uncomfortably high” inflation will likely last another year, Treasury Secretary Janet Yellen told CNBC.

Bipartisan push

While last year’s tax cuts were mostly made by Republican-led state houses, rising inflation in 2022 has sparked bipartisan pressure for relief.

“There’s a good mix of tax cuts offered by members of both parties,” Lughead said.

For example, New York Democratic Governor Kathy Hochul called for accelerating a tax cut for middle-class residents, including a property tax rebate program, during her state of the art address. the January state.

And last week, New Jersey Gov. Phil Murphy, also a Democrat, proposed a property tax relief plan in the form of rebates for 1.8 million homeowners and residents.

State budget surpluses

The wave of state tax cuts was fueled by better-than-expected revenues after states cut their forecasts sharply at the start of the pandemic, Sigritz said.

Many states have extended tax deadlines from April to July 2020, resulting in an unexpected increase in revenue in fiscal year 2021, beginning July 1 in most places. Additionally, the US bailout, signed in March 2021, allocated $195.3 billion in federal support to states.

Meanwhile, high-income Americans have continued to work through most of the pandemic, raising state income taxes, and federal stimulus funds have supported spending in local economies, Auxier said.

“You got that boost from ‘sky falling’ to strong growth,” he said.

You’ve had that boost from the “sky falling” to strong growth.

Richard Auxier

Senior Policy Associate at the Urban-Brookings Tax Policy Center

As a result, state revenue collectively increased by 14.5% in fiscal year 2021 compared to 2020, according to a report by the National Association of State Budget Officers.

This was a very surprising result, given the number of Covid-19 cases, local restrictions and business closures, said Tim Speiss, CPA and partner at EisnerAmper in New York.

Although much of the individual aid has flowed through local economies, growth is still above pre-pandemic levels.

Indeed, 32 states expect revenue in fiscal year 2022 to be higher than originally forecast, according to the report from the National Association of State Budget Officers.

‘Competitive environment’

The slew of tax cuts and relief on offer comes as some higher-tax states get rid of their residents.

The $10,000 cap on the federal deduction for state and local levies for itemizing filers, known as SALT, is an ongoing concern for places with above-average incomes and property taxes.

“They’re losing a lot of residents, especially in this era of increased remote work flexibility, where many people can work permanently from wherever they want,” Lughead said.

From April 2020 to July 2021, higher tax areas such as California, Hawaii, Illinois, New York and the District of Columbia were the top five to lose residents.

During the same period, Idaho’s population increased by 3.4%, while Arizona, Delaware, Florida, Montana, Nevada, North Carolina, South Carolina, Texas and Utah all recorded growth of 1% or more.

That’s according to a Tax Foundation report analyzing data from the US Census Bureau, U-Haul and United Van Lines.

“We’re seeing a really competitive environment where states are looking for ways to make a name for themselves,” Lughead said.

We are witnessing a very competitive environment where states are looking for ways to make a name for themselves.

Katherine Loughead

Senior Policy Analyst at the Tax Foundation

However, some policy experts worry about the long-term effects of permanent tax breaks.

“What’s troubling about rate cuts is that they’re very expensive,” Auxier said, explaining that future earnings may not support those moves.

However, some income tax cuts are designed to be spread over several years, based on future income growth to balance budgets, Sigritz said.

Yet while tax cuts may be popular in an election year, states still have plenty of time to carefully allocate and spend unused US bailout funds, Auxier said.