Tax windfall prompts states to consider range of tax cuts – The Journal

Soaring tax revenues and billions in pandemic aid from the federal government have left many states with the unusual problem of having too much money

ANNAPOLIS, Md. (AP) — Soaring tax revenues and billions in pandemic aid from the federal government have left many states with an unusual problem — too much money.

The result is one of the broadest movements in recent memory aimed at giving consumers and taxpayers a break. In red and blue states, lawmakers and governors are proposing to cut taxes and fees, create tax credits, or delay tax and fee hikes that were planned before the COVID-19 pandemic. 19 does not knock.

Even high-tax states controlled by Democrats, from California to New Jersey, are dangling the possibility. Among these is Washington State, where a Democratic senator has proposed reducing the state sales tax from 6.5% to 5.5%.

“We need to get money out of people’s pockets if we are to fully recover from the high public health and economic cost of this pandemic,” said State Senator Mona Das, the Democrat who proposed the measure. Legislative leaders in his party favor the idea of ​​using temporary revenue to fund permanent cuts, but some have rallied around a unique sales tax exemption proposal.

State coffers are overflowing after nearly two years of Congress pumping out trillions of dollars to help the US economy stay afloat during the pandemic, including sending billions to state governments. Most are embracing or considering tax cuts while considering big increases in schools and public infrastructure.

Income and sales taxes are on the chopping block, as are vehicle registration fees, gasoline taxes and more.

In Maryland, Republican Gov. Larry Hogan has long called for an income tax phase-out for retirees, which he says will reduce the migration of people leaving the state to low-tax countries. like Florida when they’re done working. He may finally have a window to strike a deal with the Democratic-controlled legislature.

The state’s projected surplus for the fiscal year that begins July 1 is $4.6 billion on a budget of $58.2 billion. This gives Hogan leeway for a renewed effort to sell his plan. As part of the deal, he also calls for making permanent an enhanced Democrat-favorite income tax credit for low-income workers that was put in place last year as a temporary measure.

“We can now afford to do this,” Hogan told reporters at the start of this year’s legislative session.

The idea is appealing to retirees such as Karen Morgan, an attorney who worked for the state legislature and lives in a Maryland suburb outside of Washington, DC.

“It would be nice not to have to spend some of those limited resources on taxes, and that means there’s extra money to spend on health care,” Morgan, 65, said. “There’s extra money to spend managing my life. You know, it doesn’t get easier with age.

For Maryland and other state governments, the fiscal fallout from the pandemic turned out to be the opposite of the calamity they were bracing for in the spring of 2020.

The federal government has allocated states and local governments about $500 billion in general relief, plus more for specific areas such as education. He offered separate aid to businesses and pledged to invest $1 trillion in infrastructure spending, with much of that money channeled through states.

And most high earners have avoided layoffs during the pandemic and investors have done well – keeping tax revenues high. Consumers used that money to buy a lot of goods: home office furniture, patio heaters, vehicles. This sent sales tax revenue skyrocketing, a key source of government revenue in most states.

“States have more money than they can realistically and sustainably spend,” said Jared Walczak, vice president of state projects at the Tax Foundation, a Washington-based think tank that advocates for growth-enhancing tax policies.

Walczak counted 16 states with income tax cuts last year, including a move to a flat tax in Arizona and a sweeping change in Arkansas that passed alongside a tax credit for low income people. The Urban Institute identified 29 states that cut taxes or expanded tax credits last year.

Walczak says more than a dozen states are seriously considering income tax cuts this year.

He said states need to consider tax cuts because the pandemic has made it clear that many people can move to a more desirable location and still work remotely. But some plans could go too far – and some tax cuts could end up disproportionately hurting low-income people.

A proposal in Republican-dominated Mississippi to phase out personal income taxes could drop revenues enough to force cuts in state government spending in years to come. The plan has already passed the House, but Senate Republicans are calling for shallower cuts.

In addition to the income tax proposal, the House bill would reduce the taxes people pay each year to renew their vehicle license plates and reduce the sales tax on groceries. . But sales tax on most other items would increase from 7% to 8.5%.

“The end result would be a tax code that rewards hard work and is fairer for everyone,” said Republican State Rep. Trey Lamar, chairman of the House Ways and Means Committee.

But Deloris Suel, 73, isn’t convinced the broader sales tax increase — which isn’t included in the Senate GOP plan — would be fair. She operates a daycare center in Jackson and said the changes will end up costing the low-income families her daycare serves. Suel said a higher sales tax would hit them hard and would not be balanced by eliminating income tax because many of them earn too little to be required to pay it now.

Suel said lawmakers should assess the impact of tax cuts before rushing to make a decision.

“Sometimes Mississippi joins in to be a part of something,” she said.

Analysis by One Voice, which advocates for vulnerable and marginalized people, found that the tax plans would save $30,000 a year for those with the highest incomes in the state, but slightly increase the overall tax burden for those earning less than $19,000.

In search of more widespread benefits, grocery taxes, which are in place in about a dozen states, are targeted.

That includes Illinois, where the governor has proposed a one-year suspension that would save consumers in the state $360 million. Democratic Gov. JB Pritzker touted it as a way to fight inflation, along with relief at the gas pump and on property tax bills.

In Oklahoma, where the GOP-led legislature slashed personal and corporate income tax rates last year amid higher-than-expected revenues, some Republicans are talking about even more cuts. taxes, including sales tax on groceries.

Rep. Sean Roberts, a Republican also running for Congress, wants a public vote on whether to scrap the food tax.

“We currently have a surplus of funds and revenues are up, so it’s time to provide this much-needed relief to families in Oklahoma,” he said.

Tax and fee reductions are on the table in Colorado, New York, Rhode Island and Utah. Even in fiscally happy California, Democratic Gov. Gavin Newsom is proposing to delay the next stage of a multi-year gas tax hike.

But some economists warn that states must be careful not to make permanent tax cuts, noting that periods of crisis will not last forever.

“What goes up must come down,” said Michael D’Arcy, who tracks public finances for Fitch Ratings.

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Mulvihill reported from Cherry Hill, New Jersey. Associated Press writers James Anderson in Denver also contributed to this article; Andrew DeMillo in Little Rock, Arkansas; Rachel La Corte in Olympia, Wash.; Jennifer McDermott in Providence, Rhode Island; Sean Murphy in Oklahoma City; John O’Connor in Springfield, Ill.; Emily Wagster Pettus in Jackson, Mississippi; and Lindsay Whitehurst in Salt Lake City.