State Rundown 1/14: Bad Tax Cut Ideas Prove to Be Endemic

As states kick off their 2021 legislative sessions, it’s clear that many governors and lawmakers are attempting to “take a mulligan” on the last year and recycle tax-slashing ideas that were already bad in 2020 and are even worse now as states try to recover from the Covid-19 pandemic and accompanying downturn. Despite the fact that states with progressive income taxes like California and Maryland are doing the best financially through the pandemic and are now exploring providing much-needed direct relief to their hardest-hit residents, policymakers in many other states—including Arizona, Arkansas, Idaho, Iowa, South Carolina, Utah, and West Virginia—are nonetheless brushing off the same tired tax cut ideas they have been promulgating for years. We all deserve some leeway on achieving our 2020 resolutions, but hopefully we learned something. On a brighter note, Illinois leaders showed they did learn from the events of 2020, passing a major criminal justice reform bill and payday loan protections intended to reduce racial inequities.

Major State Tax Proposals and Developments

• A failed effort to decouple from corporate tax breaks passed last year in the federal CARES Act will deprive ILLINOIS of $500 million to $1 billion of revenue needed to address a structural deficit made worse by the coronavirus pandemic. Lawmakers however passed a sweeping criminal justice reform bill in the final hours of their lame duck session, ending cash bail in the state while increasing police accountability measures. They also capped interest rates on payday lending loans. The passed bills are part of the Illinois Legislative Black Caucus’ priorities for narrowing economic disparities faced by Black and brown communities in the state. – LISA CHRISTENSEN GEE
• Republicans in UTAH are preparing their plans to cut taxes ahead of the start of the 2021 legislative session. Some ideas include expanding Social Security tax credits, fixing the dependent exemption, lowering the tax burden for military retirees, or a temporary cut to the state’s 4.95 percent flat income tax. – MARCO GUZMAN

Governors’ Annual Addresses and State of State Speeches

• ARIZONA Gov. Doug Ducey, called for reforming and cutting taxes to ensure that the state remains competitive with others in his 2021 State of the State address.
• In his 2021 State of the State address, ARKANSAS Gov. Asa Hutchinson, called for two specific tax proposals, including a reduced income tax rate of 4.9 percent (down from 5.9 percent) for new residents for five years and a sales tax rate reduction on used cars from 6.5 percent to 3.5 percent.
• IDAHO Gov. Brad Little announced in his 2021 State of the State address that he is proposing $295 million in one-time tax relief and $160 million in permanent tax cuts.
• After announcing recently that she would pause her effort to shift IOWA taxes onto lower- and middle-income families, Gov. Kim Reynolds clarified in her address that in these “uncertain and difficult times” she will instead prioritize accelerating 2018 tax cuts that were originally made dependent on revenue triggers to ensure they wouldn’t take effect during…uncertain and difficult times. Those tax cuts include regressive components such as rate cuts and full coupling to the federal pass-through deduction, as well as some positive base-broadening changes such as eliminating Iowans’ ability to write off federal taxes on their state returns.
• NEW YORK Gov. Andrew Cuomo pushed for cannabis legalization and taxation in his speech but otherwise denied that the state has a meaningful role to play in its revenue issues, claiming it “must be financed by Washington.”
• SOUTH CAROLINA Gov. Henry McMaster proposed cutting income tax rates by 15 percent across the board over five years, dependent on a revenue trigger of 5 percent growth.
• In his inaugural speech, VERMONT Gov. Phil Scott urges against tax increases and promotes Tax Increment Financing as a tool for the state’s economic recovery.
• Other recent speeches with less tax content included those by CONNECTICUT Gov. Ned Lamont, KANSAS Gov. Laura Kelly, KENTUCKY Gov. Andy Beshear, NEW JERSEY Gov. Phil Murphy, NORTH DAKOTA Gov. Doug Burgum, SOUTH DAKOTA Gov. Kristi Noem, VIRGINIA Gov. Ralph Northam WASHINGTON Gov. Jay Inslee, and WISCONSIN Gov. Tony Evers.
• A full list of scheduled addresses is available here, including those to come in the next week in GEORGIA, INDIANA, and NEBRASKA.

Budget and Covid Response Proposals

• MAINE’s Gov. Janet Mills released her budget proposal this week. The proposal includes no tax increases and no cuts to services.
• MARYLAND Gov. Larry Hogan proposed a $1 billion package of economic recovery legislation featuring direct payments of up to $450 to $750 for Maryland’s 400,000 EITC recipients. The package would also repeal taxes on unemployment benefits and suspend sales taxes for restaurants and small businesses for four months. Hogan plans to pay for the measures through Rainy Day Fund withdrawals and continuation of funding cuts from prior sessions.

State Roundup

• A range of legislation has been pre-filed in cash-strapped ALASKA, including two bills to continue pursuing a state-level income tax, a proposal to boost state property taxes on oil infrastructure, and a move to enshrine the state’s Permanent Fund dividend in the Alaska Constitution.
• CALIFORNIA’s progressive income tax is to thank for the state’s relatively solid revenue performance in 2020 and makes it possible for the state to send aid to hard-hit families and continue to prioritize goals like reducing homelessness and improving healthcare that many thought would have to be put on the backburner.
• COLORADO lawmakers are looking to boost transportation funding in 2021 by adding a fee to the purchase of a gallon of gas on top of the state’s 22 cent per gallon gas tax.
• KANSAS lawmakers are looking to revisit tax cut proposals that would lower the food sales tax, allow taxpayers to itemize deductions on their state returns, and permit multinational corporations to bring overseas profits to Kansas without taxes that were vetoed by the governor in 2019.
• In a recent poll MASSACHUSETTS millionaires’ tax, which would add a 4-cent surtax on household income over $1 million, maintains popular support.
• NEBRASKA Gov. Pete Ricketts will again attempt to restrict funding for to K-12 schools and other local services like police and fire protection in the name of reducing local property taxes while refusing to raise the state-level revenue necessary to help maintain those services without property taxes. At least one lawmaker has introduced a bill to do so, capping property taxes at one-third of school funding without identifying any funding to fill in the $670 million shortfall such a cap would create.
• Legislative leaders in NEW HAMPSHIRE recommitted to their priority of reducing business taxes while reupping their opposition to raising additional revenue for issues such as education funding through tax increases.
• In NORTH CAROLINA, a new report by a special commission made up of the public and private sectors offers recommendations to boost the state’s transportation funding.
• UTAH lawmakers are exploring options to reform the gas tax and replace it with a road user charge.
• WEST VIRGINIA’s new Senate president set two priorities for the legislative session: broadband expansion and the reduction/elimination of the state’s income tax.
• A WYOMING bill recently introduced would increase the cigarette tax from 60 cents to 84 cents. Another bill would phase out the fuel tax in favor of a road user charge by March 2022. Motorists would pay 2.15 cents per mile, while professional drivers would pay up to 14.35 cents per mile.

What We’re Reading

• Stateline calls attention to the sharpest short-term rise in poverty in history—which occurred around the nation between June and September but was somewhat masked by continued high incomes for rich households and white-collar workers. Houston, Texas, and Miami, Florida, are among the cities with nearly half of residents struggling to pay basic bills, and Nevada is the worst-off state by this measure.
• Route Fifty reports that state and local public employees were among the worst hit by December job losses, but also notes that policymakers have new optimism for another round of federal Covid-19 relief aid thanks to changes in power at the federal level.
• In a recent report, Policy Matters Ohio makes the case for a state-level corporate profits tax. The report points to corporations that are enjoying immense profits from the pandemic but are not contributing their fair share to vital state-funded public services.
• The Center on Budget and Policy Priorities has guidance out on how states can protect their revenue streams by decoupling from business tax breaks included in the federal CARES Act.

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