Many states are facing a unique problem due to high tax revenues and the billions of dollars in federal pandemic assistance.
This is one of the largest-based movements in recent history to give consumers and taxpayers a break. Legislators and governors in red and blue are proposing to reduce taxes and fees, create credit for tax, and delay tax and fee increases that were planned before the COVID-19 pandemic.
The possibility is even possible for high-tax states, such as New Jersey and California, that are controlled by Democrats. Washington state is one example. A Democratic senator proposed lowering the state’s sales tax from 6.5% down to 5.5%.
State Sen. Mona Das, a Democrat, said that the measure was necessary to “get money back into people’s pockets if there’s to be a full recovery from high public health costs and economic losses caused by this pandemic.” While many in her party are opposed to using temporary revenue to fund permanent cuts, others have supported a proposal for a one-time sales taxes holiday.
After nearly two years of Congress spending trillions to keep the U.S. economy afloat during the pandemic, and including billions to the states, the state coffers are bursting. Many are considering or enacting tax cuts while simultaneously considering large increases in public schools and infrastructure.
As well as vehicle license fees, gas taxes, and income taxes, sales and income taxes will be eliminated.
Maryland’s Republican Governor. Larry Hogan has been pushing for a gradual removal of income taxes for retired. This, he claims, will decrease the number of people moving to lower-tax states like Florida after they retire. Hogan may have a chance to strike a deal with the Democrat controlled legislature.
The projected surplus of the state for the fiscal year which begins July 1, is $4.6 billion, in a budget of $58.2 trillion. Hogan has plenty of leeway to sell his plan again. Hogan is also calling for the permanentization of an enhanced income tax credit that Democrats favor for lower-income workers, which was temporarily in place last year.
Hogan stated to reporters that “we now have the ability to do this,” at the beginning of this year’s legislative session.
Retirees like Karen Morgan, who was a Maryland lawyer and now lives in a Maryland suburb near Washington, D.C., find the idea appealing.
Morgan, 65, said that it would be nice not to have to spend some limited resources on taxes. That means there is more money to spend on healthcare. “There is more money available to manage my life. It doesn’t get easier as you age.
Maryland and other states have found that the fiscal consequences of the pandemic are actually the opposite of what they had feared in 2020’s spring.
The federal government has provided $500 billion to states and local governments in general relief. It also provides additional funding for specific areas like education. The federal government has provided separate assistance to businesses and committed $1 trillion to infrastructure spending. Most of this money is funneled through the states.
The majority of high-earners escaped being laid off during the pandemic, and investors have done well, keeping income tax receipts high. The money has been used by consumers to purchase a wide range of goods, including furniture for their homes, patio heaters, and vehicles. This has driven sales tax revenue, which is a major source of income for most states, to soaring.
Jared Walczak (Vice President of State Projects at the Tax Foundation), a Washington-based thinktank that promotes tax policies that foster growth, stated, “States have more than they can realistically or sustainably spend.”
Walczak compiled 16 states that saw income tax reductions last year. This included a move towards a flat tax for Arizona and an expansive one in Arkansas, which was passed along with a tax credit to low-income earners. The Urban Institute has compiled a list of 29 states that have cut taxes or increased tax credits in the last year.
Walczak claims that more than a dozen states are considering income tax cuts this year.
Because of the pandemic, many people are able to move to more desirable places and work remotely from home. He suggested that states should consider tax cuts. Some plans may go too far, and tax cuts might end up hurting people with lower incomes.
The proposal to eliminate the personal income tax in Republican-dominated Mississippi could cause significant revenue loss and force state spending cuts in the future. While the House has already passed the plan, Senate Republicans want to make smaller cuts.
The House bill, in addition to the income tax proposal would lower the taxes that people pay each year for renewing their vehicle license plates and reduce the grocery sales tax. The sales tax on all other items would increase from 7% to 8.5%.
“The end result would have a tax code which rewards work and is fairer to everyone,” stated Trey Lamar (Republican state Representative), chairman of the House Ways and Means Committee, which focuses on tax writing.
Deloris Suel (73) isn’t convinced that a larger sales tax increase — which isn’t included in the Senate GOP Plan — would be fair. She runs a Jackson child care center and believes that the changes will end up costing low-income families she serves. Suel stated that a higher sales tax would be a major hit and would not be balanced with the elimination of income tax, as many people make too little money to be required to pay it.
Suel stated that lawmakers should assess the effects of tax cuts before making a rush to make a decision.
She said, “Sometimes Mississippi joins in because it is part of something.”
One Voice, a group that advocates for vulnerable and marginalized individuals, concluded that tax plans could save $30,000 per year for people with the highest incomes in the state, but slightly increase the overall tax burden for those earning less than $19,000.
To seek greater benefits, taxes on groceries are being targeted. They are currently in effect in around a dozen states.
This includes Illinois, where Governor proposed a one year suspension which would collectively save $360 million for consumers. Democratic Governor J.B. Pritzker argued it as a way of combating inflation and relief at the pump and on property taxes bills.
Oklahoma’s GOP-led legislature reduced individual and corporate income taxes last year amid higher-than-expected revenues. Some Republicans are now talking about further tax cuts, including the grocery sales tax.
Rep. Sean Roberts is a Republican and is also running for Congress. He wants a public vote to decide whether the grocery tax should be removed.
He stated that Oklahoma currently has a surplus in revenues and funds, and now is the right time to provide this much-needed relief for families.”
In Colorado, New York and Rhode Island, tax and fee reductions are possible. Even in California, where tax is a happy state, the Democratic Governor. Gavin Newsom proposes delaying the next step of a multi-year increase to the gas tax.
However, economists warn that states need to be cautious about permanent tax cuts. They should remember that flush times will not last forever.
Michael D’Arcy is a Fitch Ratings analyst who studies public finance. He said, “What goes up must go down.”
