(C) Common Dreams
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States’ Recent Tax-Cut Spree Creates Big Risks for Families and Communities [1]

['February', 'November']

Date: 2024-01

State policymakers nationwide have embarked on a tax-cutting spree over the past three years, using the cover of temporary budget surpluses stemming from robust federal aid in response to COVID-19 and the economic recovery that followed. The tax cuts — most of which are both permanent and tilted toward wealthy households and corporations — will weaken state revenues by large and growing amounts over time, limiting these states’ ability to maintain support for schools and other vital public services or make new investments that can strengthen the economy and promote opportunity. From 2021 to 2023:

Twenty-six states cut their personal income tax rates and/or corporate income tax rates, 13 of them multiple times. Permanent cuts to tax rates are especially harmful to state balance sheets since they reduce revenues every year going forward absent further legislative action, in contrast to temporary or one-time tax cuts.

Combined, the cuts will cost those 26 states an estimated $124 billion by 2028, including $13 billion that they have already lost (2022-2023) and $111 billion over the next five years (2024-2028). That means, together, rate-cutting states will collect an estimated 3.6 percent less in general revenue over the next five years than if they had not enacted the cuts. This 3.6 percent share is equivalent to more than a third of states’ general fund spending on higher education and more than half of what goes to state correctional systems. [1]

Rate cuts in Arizona, North Carolina, and West Virginia are especially large and could shrink their general funds by about 11 percent over the next five years, losses comparable to the disastrous Brownback tax cuts in Kansas during the 2010s.

These sums don’t include lost revenues from a wider swath of tax reductions enacted during this time, such as one-time rebates and senior tax breaks. All told, 48 states and the District of Columbia passed some sort of tax cut from 2021 to 2023, according to the Tax Policy Center.[2]

Rate Cutting Is Historically Large in Size, Scope

While no comprehensive accounting exists of state income tax rate cuts over time, available evidence indicates that the COVID-era wave of 26 states cutting rates (see Figure 1), while not unprecedented, is historically large and will lead to substantial damage for public services.

The combined costs of all tax changes states adopted for the 2023 budget year, as well as those proposed in governors’ 2024 budgets, exceed the tax cuts enacted after the Great Recession.

In the decade after the Great Recession took hold in 2008, for example, 18 states cut their personal and/or corporate income tax rates; these policies led to sharp increases in public college tuition, cuts in school funding, and a weakening of income supports like unemployment insurance, which both harmed people and communities and contributed to a slower economic recovery.[3] Before that, more than half of the states cut income tax rates during a period of strong economic growth from 1994 to 2001, only to see revenues plummet and budget cuts ensue when the dot-com bust ushered in a recession.[4]

The combined costs of all tax changes states adopted for the 2023 budget year (including income tax rate cuts and other policies, such as sales tax holidays), as well as those proposed in governors’ 2024 budgets, exceed the tax cuts enacted after the Great Recession and are comparable to those passed from the late 1990s through fiscal year 2001, after adjusting for inflation.[5]

Tax Cuts Will Grow Increasingly Costly

The tax cuts enacted in recent years will carry a hefty cost. (See Figure 2.) While Arizona, North Carolina, and West Virginia stand out for their especially costly tax cuts, lost revenues in the other tax-cut states are by no means insignificant. For example, tax cuts are projected to shrink general fund revenues by at least 6 percent over the next five years in Arkansas, Idaho, Iowa, Kentucky, Nebraska, and North Dakota. And even where the cuts are smaller as a percentage of general revenues, they are significant in dollar terms. For example, over the next five years, income tax cuts could total nearly $9 billion in Ohio, more than $5 billion in Georgia and Wisconsin, more than $4 billion in South Carolina, and more than $3 billion in Indiana, Pennsylvania, and Utah.[6]

Furthermore, because these rate changes are permanent[7] barring future legislative action, unlike one-time or temporary changes such as a sales tax holiday, the revenue losses will continue and grow each year unless future policymakers reverse course. Based on our estimates, such future losses will be substantial: by 2028, the annual price tag from the 2021-2023 tax-cutting wave could grow to $29 billion a year nationwide. (See Figure 3.)

Some states won’t feel the full impact of the income tax cuts right away because they are implementing them over several years through phase-ins or triggers.[8] While commonly sold as a more fiscally responsible approach to cutting state taxes, such approaches simply obscure the policies’ true costs. For example, Pennsylvania policymakers in 2022 chose to cut the corporate income tax rate in half over eight years, with the cut not taking full effect until 2031. As a result, the cost will balloon from $127 million in 2023 to nearly $1.5 billion in 2031.[9] In Kentucky and West Virginia, recently enacted tax plans could eventually eliminate personal income taxes altogether if new revenue triggers are met.

This policy approach also means that policymakers can cut taxes today without simultaneously making the spending cuts, or shifts to more regressive sources of revenue, that will ultimately be needed as the cost of the tax cuts balloon. By separating the harmful and unpopular effects of the policy from their root cause, such automatic or triggered tax cuts ultimately undermine democratic accountability.[10] In some cases, policymakers may never have to deal with the fallout. For example, in Michigan, policymakers in 2023 sought unsuccessfully to try and sidestep a pending income tax cut approved in 2015, when none of them were in office and the economy was very different.[11]

In many states, proponents have pointed to budget surpluses to justify large tax cuts. But those surpluses reflected in part the historically large federal response to the COVID-19 pandemic, which boosted state budgets both directly (through fiscal aid to states) and indirectly (through economic relief that helped consumers and businesses weather the crisis and fueled a strong economic recovery and better-than-expected revenues). The economic relief has now expired, and the fiscal aid has mostly been spent; the rest must be obligated by the close of 2024.[12] In short, the surpluses that many states enjoyed over the past three years were temporary, whereas the cost of reducing states’ income tax rates is permanent.

In addition, state revenue trends are expected to return to normal in most states. According to state estimates, general fund revenues will remain roughly flat nationwide in the 2024 budget cycle, continuing a trend from the prior year — in sharp contrast to 2021 and 2022, when revenues grew at historically high rates.[13] Recent data confirm that state revenues are indeed weakening, due to economic and geopolitical factors along with the early costs of the recent tax cuts.[14] For example, state tax revenues overall were 11.5 percent lower in the first quarter of 2023 than in the first quarter of 2022, accelerating a downward trend that began late in 2022. (See Figure 4.) State personal income tax revenue has fallen even more steeply, coming in 22.5 percent lower in the first quarter of 2023 than the first quarter of 2022.[15]

Cuts Risk Current Services, Constrain Future Potential

Tax cuts on this scale will seriously hamper states’ ability to adequately fund services and public assets that state revenues support or to consider new investments to address current or emerging needs.

In the most extreme cases, the resulting revenue losses could lead states to cut spending below current levels for schools, hospitals, libraries, or other supports for children, families, seniors, or vulnerable populations, as occurred in Kansas after particularly costly cuts enacted in the 2010s (see box, “Flat Tax Fails in Kansas”). In other states, policymakers will have fewer dollars to keep up with naturally growing needs and costs due to population growth or inflation, such as when class sizes or agency caseloads rise or first responders’ paychecks stagnate.[16] And in still other states, policymakers simply won’t have sufficient funds to address pressing public problems.

Consider the following examples:

Arkansas enacted four rounds of personal and corporate income tax cuts in 2021, 2022, and 2023. For the annual cost of just one of those cuts, enacted in the spring of 2023, policymakers could have created an eight-week paid parental leave program for all parents in the state. [17]

enacted four rounds of personal and corporate income tax cuts in 2021, 2022, and 2023. For the annual cost of just one of those cuts, enacted in the spring of 2023, policymakers could have created an eight-week paid parental leave program for all parents in the state. Kentucky enacted a substantial income tax cut in two steps in 2022 and 2023 that will cost $1.3 billion annually — more than the state spends on its entire system of public colleges and universities. [18]

enacted a substantial income tax cut in two steps in 2022 and 2023 that will cost $1.3 billion annually — more than the state spends on its entire system of public colleges and universities. Nebraska enacted three rounds of income tax cuts over the past three years, which will cost an estimated $1 billion annually by 2028. This revenue loss equals roughly what Nebraska spends on its entire Medicaid program, which serves nearly 400,000 low-income children and adults, seniors, and people with disabilities. [19]

enacted three rounds of income tax cuts over the past three years, which will cost an estimated $1 billion annually by 2028. This revenue loss equals roughly what Nebraska spends on its entire Medicaid program, which serves nearly 400,000 low-income children and adults, seniors, and people with disabilities. West Virginia enacted a sweeping personal income tax cut in 2023 that will likely cost more than $800 million annually starting in 2025 and potentially more over time if new triggers are hit, further exacerbating existing shortfalls in higher education and other state services.[20] The cuts will also limit the state’s future potential by sapping revenues that could have otherwise been invested in people’s unmet needs; for example lifting the incomes of all poor West Virginia families with children above the poverty line would cost about half as much as the recent tax cut, according to one estimate.[21]

Cuts Are Regressive and Inequitable

Recent state income tax cuts have also been overwhelmingly titled toward taxpayers who are already doing very well, and have disproportionately benefited white households. For example:

In Arizona , households of color account for more than 1 in 3 taxpayers in the state but would receive only an estimated 21 percent of the benefits from the tax plan enacted in 2021. [22]

, households of color account for more than 1 in 3 taxpayers in the state but would receive only an estimated 21 percent of the benefits from the tax plan enacted in 2021. In Arkansas , the highest-income 20 percent of residents will receive an estimated 80 percent of the benefits from a personal income tax cut enacted in 2023. Meanwhile, an estimated 80 percent of the benefits from corporate income tax cuts enacted that year will leave the state entirely, going to out-of-state corporate shareholders. [23]

, the highest-income 20 percent of residents will receive an estimated 80 percent of the benefits from a personal income tax cut enacted in 2023. Meanwhile, an estimated 80 percent of the benefits from corporate income tax cuts enacted that year will leave the state entirely, going to out-of-state corporate shareholders. In Montana , nearly 96 percent of a 2021 tax cut will go to white Montanans. Indigenous residents not living on federally recognized reservations received only 0.9 percent of the cut, despite filing 1.9 percent of state tax returns. Montanans of any “other single race,” a broad category that includes all people of color due to state data limitations, file 5.6 percent of returns but received just 3.6 percent of the total tax cut. [24]

, nearly 96 percent of a 2021 tax cut will go to white Montanans. Indigenous residents not living on federally recognized reservations received only 0.9 percent of the cut, despite filing 1.9 percent of state tax returns. Montanans of any “other single race,” a broad category that includes all people of color due to state data limitations, file 5.6 percent of returns but received just 3.6 percent of the total tax cut. In West Virginia, the top 20 percent of taxpayers will receive 65 percent of the benefits of a 2023 tax cut. The bottom 20 percent of filers (those making under $19,000 a year) will receive $21 per year on average, while the top 1 percent (those making $467,000 or more), will get around $10,000 apiece.[25]

These lopsided impacts reflect the fact that the income tax is generally the only major state tax that is progressive — in other words, higher-income households pay a larger share of their incomes in tax. Thus, cutting state income taxes almost always tilts state revenue systems further in favor of higher-income taxpayers, a group that is also disproportionately white due to historical racism.[26] During the 2021-2023 span, Arizona, Georgia, Idaho, Iowa, and Mississippi went a step further, shifting the underlying structure of their revenue systems further in favor of high-income people by replacing their graduated income tax structure with a flat tax.[27]

Flat Tax Fails in Kansas In one of the most notable tax cut debates of 2023, a massive flat tax plan in Kansas fell short after Governor Laura Kelly vetoed the measure, citing its “reckless” costs and outsized benefit to wealthy taxpayers, and the majority-Republican legislature upheld the veto by a single vote.a The centerpiece of the plan would have replaced the personal income tax’s graduated rate structure, which has a top rate of 5.7 percent, with a single 5.15 percent flat rate. While all taxpayers would have received some tax cut, the gains would have mostly flowed to the top, with nearly two-thirds of the overall benefit going to the top 20 percent of households — those earning close to $300,000 a year, on average.b And the cost would have been enormous: nearly $1.4 billion over just the first three years. The plan’s defeat is especially notable given Kansas’ recent history with tax cutting. In 2012, then-Governor Sam Brownback launched Kansas on what he called a “real live experiment” in extreme tax cutting.c Billed as a way to boost the state economy, the tax cuts led instead to plunging revenues and cuts in K-12 schools and higher education, as well as other public services. Two bond rating agencies downgraded Kansas due to its budget problems, and to balance its budget the state delayed road projects, employed various one-time budget gimmicks, and nearly drained funds it had set aside to prepare for the next recession, among other things.d In 2017 lawmakers agreed on a bipartisan basis to repeal most of the tax cuts. Kansas’ experience provides important lessons for other states. States that have passed unaffordable tax cuts should revisit them, ideally sooner rather than later to limit the damage. And states should reject new proposals that would take them down the path of extreme tax cutting. a John Hanna, “Gov. Kelly vetoes bill to cut Kansas taxes by nearly $1.4 billion over 3 years,” PBS Newshour, April 25, 2023, https://www.pbs.org/newshour/politics/gov-kelly-vetoes-bill-to-cut-kansas-taxes-by-nearly-1-4-billion-over-3-years. b Brakeyshia Samms, “Kansas Avoids Flat Tax Proposal: Narrow Victory a Cautionary Tale for Other States,” ITEP, April 27, 2023, https://itep.org/kansas-flat-tax-proposal-cautionary-tale-for-other-states/. c Max Ehrenfreund, “Kansas Republicans raise taxes, ending their GOP governor’s ‘real live experiment’ in conservative policy,” Washington Post, June 7, 2017, https://www.washingtonpost.com/news/wonk/wp/2017/06/07/kansas-republicans-raise-taxes-rebuking-their-gop-governors-real-live-experiment-in-conservative-policy/. d Michael Mazerov, “Kansas Provides Compelling Evidence of Failure of ‘Supply-Side, Tax Cuts,” CBPP, January 22, 2018, https://www.cbpp.org/research/state-budget-and-tax/kansas-provides-compelling-evidence-of-failure-of-supply-side-tax.

Other States Following Brighter Path

Some states in recent years have chosen a different path that protects and raises revenues to better support current public services and launch new investments in areas such as affordable housing, universal free meals for schoolchildren,[28] and paid family leave. For example:

The District of Columbia in 2021 raised income tax rates on individuals with taxable incomes above $250,000, generating about $100 million in annual revenues to support affordable housing, wage subsidies for day-care workers, and tax credits for low-income families. [29]

in 2021 raised income tax rates on individuals with taxable incomes above $250,000, generating about $100 million in annual revenues to support affordable housing, wage subsidies for day-care workers, and tax credits for low-income families. Massachusetts voters in 2022 approved a constitutional amendment to enact a 4 percent surcharge on income over $1 million, on top of that state’s existing 5 percent flat rate on all taxable income. [30] The measure is expected to eventually raise at least $2 billion annually, with all new revenues dedicated to public education and transportation. [31]

voters in 2022 approved a constitutional amendment to enact a 4 percent surcharge on income over $1 million, on top of that state’s existing 5 percent flat rate on all taxable income. The measure is expected to eventually raise at least $2 billion annually, with all new revenues dedicated to public education and transportation. Minnesota enacted a wide-ranging set of social and economic policies in 2023 to improve the lives of children, workers, and families, including universal free meals for public school students and a new paid leave program. [32] To pay for these investments, policymakers adopted revenue-raising measures targeted to wealthy households and corporations, [33] including a partial crackdown on corporate tax avoidance that policymakers there can further build on. [34]

enacted a wide-ranging set of social and economic policies in 2023 to improve the lives of children, workers, and families, including universal free meals for public school students and a new paid leave program. To pay for these investments, policymakers adopted revenue-raising measures targeted to wealthy households and corporations, including a partial crackdown on corporate tax avoidance that policymakers there can further build on. Washington State in 2021 established a 7 percent excise tax on capital gains (income from the sale of stocks and other investments) received by the wealthiest 0.2 percent of taxpayers, and the state’s Supreme Court upheld it in 2023.[35] The tax is expected to generate over $500 million a year and potentially more, early evidence suggests.[36] The state has dedicated the revenue to improving and building K-12 schools and expanding childcare and early learning supports for young children.

Several other states, including Colorado, Maine, New Jersey, New York, and Vermont, have also raised new revenues in the past three years, either for general needs or to support specific new investments such as universal school meals in Colorado[37] and child care in Vermont.[38]

Conclusion

In the states that cut income tax rates in the past few years, especially those that cut them most sharply, policymakers should reverse the cuts wherever possible — as a bipartisan coalition of Kansas lawmakers did in 2017 — or at least significantly trim them back before the revenue losses grow even more severe and the need for harmful budget cuts or more regressive tax offsets grows. Policymakers in other states should avoid joining the latest round of fiscal recklessness and choose a different course: protecting and raising adequate revenues to fulfill their current responsibilities and take on new challenges to achieve a brighter future for all residents.[39]

Appendix 1: Methodology

The estimates in this report are based on the following components, with specific data included in the subsequent tables.

Annual revenue loss from tax cuts. CBPP pulled figures on potential revenue loss from the most recent reliable projections available for each of the 26 states where policymakers cut rates. These figures came either from official state sources (namely, fiscal notes or legislative budget documents and other materials) or, for a few states, independent estimates of annual revenue loss from the Institute on Taxation and Economic Policy.[40]

Wherever these baseline estimates covered the full timespan covered in this report (2022-2028), those estimates were used. In cases where the available projections stopped short of 2028, which was true of most states, we extended the final year of projected revenue loss out to subsequent years using internal CBPP inflation estimates based on Bureau of Labor Statistics and Congressional Budget Office figures.

We coordinated with members of the State Priorities Partnership network to ensure we had the most recent available projections and, in several cases, to jointly work through various state-specific idiosyncrasies. For states that enacted multiple rounds of cuts, we accounted for potential interactions and adjusted the figures wherever possible in order to avoid double-counting; in cases when some degree of subjectivity arose, we erred on the side of the more conservative estimate.

State general fund projections. In order to estimate how sharply recent state tax cuts could erode state budgets and spending down the road, we compared the above estimates of revenue loss to good-faith projections for how state general funds could reasonably have been expected to grow if not for the tax cuts.

To do this, we first accessed information on state general fund revenues for fiscal year 2022 from the National Association of State Budget Officers.[41] We then adjusted those figures forward annually through 2028 using the same inflation measure cited above, as well as each state’s average rate of per capita personal income growth over the past decade.[42] Lastly, we compared each state’s estimated annual revenue loss from the tax cuts to these estimates of projected general fund collections in order to calculate the cost of the cuts as a share of states’ general funds.

Appendix 1 State by State Data State Tax cut, years enacted Personal, Corporate, or both Revenue loss so far, in millions (2022-2023) Revenue loss, next five years, in millions (2024-2028) Estimated cost of cuts, as share of general fund revenue, over next five years (2024-2028) Revenue loss, full seven years, in millions (2022-2028) Arizona 2021 Personal ($2,194) ($12,040) 10.5% ($14,234) Arkansas 2021, 2022, 2023 (twice) Both ($757) ($4,109) 8.3% ($4,866) Colorado 2022 (ballot) Both $0 ($2,154) 1.7% ($2,154) Connecticut 2023 Personal $0 ($1,592) 1.1% ($1,592) Georgia 2022 Personal $0 ($5,189) 2.2% ($5,189) Idaho 2021, 2022 Both ($580) ($2,886) 6.7% ($3,465) Indiana 2022, 2023 Personal ($87) ($3,102) 2.2% ($3,190) Iowa 2021, 2022 Both ($57) ($4,983) 7.8% ($5,040) Kentucky 2022, 2023 Personal ($292) ($6,213) 6.3% ($6,504) Louisiana 2021 (ballot) Both $1 ($131) 0.2% ($130) Michigan 2023 (triggered) Personal ($428) ($219) 0.2% ($647) Mississippi 2022 Personal $0 ($1,984) 4.1% ($1,984) Missouri 2021, 2022 Personal ($468) ($4,569) 5.4% ($5,037) Montana 2021, 2023 Personal ($34) ($806) 3.1% ($840) Nebraska 2021, 2022, 2023 Both ($77) ($3,115) 7.6% ($3,192) New Hampshire 2021, 2022, 2023 Both ($31) ($644) 4.9% ($675) New York 2022 Personal ($162) ($1,019) 0.2% ($1,181) North Carolina 2021, 2023 Both ($2,351) ($24,315) 10.9% ($26,666) North Dakota 2023 Personal $0 ($918) 6.1% ($918) Ohio 2021, 2023 Personal ($1,700) ($8,890) 4.7% ($10,590) Oklahoma 2021 Both ($484) ($1,873) 3.0% ($2,357) Pennsylvania 2022 Corporate ($127) ($3,013) 1.0% ($3,139) South Carolina 2022 Personal ($827) ($4,632) 5.1% ($5,459) Utah 2022, 2023 Both ($229) ($3,120) 3.9% ($3,349) West Virginia 2023 Personal ($115) ($4,070) 10.5% ($4,185) Wisconsin 2021, 2023 Personal ($2,014) ($5,818) 4.3% ($7,831) Total (26 income tax-cut states) ($13,011) ($111,405) 3.6% ($124,416)

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[1] Url: https://www.cbpp.org/research/state-budget-and-tax/states-recent-tax-cut-spree-creates-big-risks-for-families-and

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