California

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...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.

New Jersey lawmakers passed an innovative tax design that other states debating cannabis legalization should look to for inspiration. The state officially legalized cannabis in November when voters overwhelmingly approved a constitutional amendment by a margin of 67 to 33 percent. The amendment applied the state’s general sales tax to cannabis and allowed local governments to create their own taxes on the industry. The legislature added the most notable part of the tax structure last month with a Social Equity Excise Fee.

Though most people’s attention is rightly focused on events unfolding in the nation’s capital this week, state legislative debates are also underway or soon to begin in many states, including proposals to tax the rich in New York and Rhode Island, provide a boost to low-income families in California, and legalize and tax cannabis in Missouri and Rhode Island.

State policymakers and advocates may face some long sleepless nights as they close the book on 2020 and prepare for the important decisions they’ll be making in 2021 and beyond. So we at ITEP have consulted with ghosts of fiscal crunches past, present, and future, and distilled their lessons into seven key things to keep in mind for 2021 tax and budget debates:

It is December 2020. Sen. McConnell has denied states—and their residents—relief for months. Congress must act now. Even if it does, it is unlikely to provide the robust aid needed to keep communities afloat and positioned for healthy recovery. Lawmakers across the country should be prepared to return to state capitals and city halls in the new year with plans to raise revenue not just to weather this crisis, but also to invest in long-term recovery.

The tepid economic recovery is leaving millions behind. The nation still has nearly 10 million jobs less than it did in February, according to the latest jobs report. The number of people living in or near poverty is rising. Twelve million workers are about to lose their unemployment insurance, roughly four in 10 people report experiencing food insecurity for the first time, and conditions are likely to deteriorate further in the weeks ahead as we brace for another deadly surge in COVID cases and new or tightened restrictions on business and personal activity.

While the results of the 2020 presidential election are all but set in stone—and a sign of life for progressive policy—the results of state tax ballot initiatives are more of a mixed bag. However, the overall fight for tax equity and raising more revenue to invest in people and communities is trending in the right direction.

Although progressive tax policy doesn’t always succeed in in statehouses or voting booths, Arizona voters showed once again that when offered a clear choice, most people resoundingly support requiring fairer tax contributions from rich individuals and highly profitable corporations over allowing their schools and other shared priorities to wither and decay. Still, a similar effort in Illinois and a more complicated measure in California were defeated, and anti-tax zealots in West Virginia and many other states will continue to push for tax cuts for the rich and defunding public investments, leaving much work to be done to advance tax justice.

Even with Halloween coming up this weekend, months of dealing with the horrors of the Covid-19 pandemic have made it hard to scare anyone in the closing months of 2020, which state lawmakers and residents are showing by voting in droves and supporting policies they had been more trepidatious about in recent years.

The Trump campaign has failed to convince the public that large numbers of Americans would face tax hikes under Democratic presidential nominee Joe Biden’s tax plan. The claim has been widely discredited. For example, ITEP found that the federal taxes that people pay directly would rise for just 1.9 percent of taxpayers in the U.S., and that number does not vary much by state. So, Fox News and other conservative voices are trying out a new argument: Biden’s tax plan would be too burdensome for that 1.9 percent.

There’s a lot at stake in this election cycle: the nation and our economy are reeling from the effects brought on by the coronavirus pandemic and states remain in limbo as they weigh deep budget cuts and rush to address projected revenue shortfalls.

State lawmakers around the nation are already looking well past the upcoming election to the legislative debates they’ll be cooking up in 2021. In Iowa and Nebraska, anti-tax groups are thawing out regressive tax shift ideas they had put on ice earlier in the pandemic. In Delaware, a lawsuit and recent settlement have put educational and property tax inequities on the menu for the upcoming session. Meanwhile New Jersey and New York are both looking to add stock to their revenue mixes with progressive taxes on stock trades.

Californians are voting now on Proposition 15, which would require commercial and industrial property worth $3 million or more to be taxed based on an up-to-date assessment of full market value. Proposition 15 is sound tax policy that would raise much needed revenue and help to advance racial and economic justice.

The biggest news for state and local fiscal debates this week was that federal fiscal relief to help with their pandemic-induced revenue crises is effectively off the table for at least another month. But if there is a silver lining to this federal inaction, it may be that it coincides with New Jersey’s success filling part of its own revenue shortfall through a millionaires tax, as well as with prominent wealth managers admitting that their rich clients don’t flee to other states in response to such taxes (see “What We’re Reading”). Combined, these three developments could encourage state leaders elsewhere…

An ITEP report finds that taxes that people pay directly would stay the same or go down in 2022 for 98.1 percent of Americans under President-elect Joe Biden’s tax plan.

A state-by-state analysis of President-elect Joe Biden’s proposal to raise taxes for filers with income of more than $400,000 finds that in 2022, just 1.9 percent of all taxpayers would face a direct tax increase. This would vary only slightly by state. For example, in West Virginia, 0.6 percent of taxpayers would see an increase, and in Connecticut, 3.7 percent of taxpayers’ taxes would increase.

New Jersey leaders grabbed the biggest headlines of the week by finally agreeing to implement a much-needed and long-discussed millionaires tax to shore up the budget and improve tax fairness. And Illinois residents can begin voting tomorrow to enact a graduated income tax there. Relatedly, ITEP Research Director Carl Davis updated our research debunking the myth that progressive taxes interfere with economic growth. Cannabis legalization and taxation was a hot topic as well, as lawmakers in Vermont reached an agreement to move forward on the matter and others in Connecticut, Kansas, and New Hampshire worked toward the same.

ITEP updated a 2017 study that examined the economic performance of the nine states with the highest top marginal tax rates compared to the nine states with no state income tax. Economies in states with the highest top marginal rates grew faster. States facing budget shortfalls should first look at raising taxes on those most able to pay (incomes at the top have grown during this economic crisis) before considering harmful budget cuts.

The Earned Income Tax Credit (EITC) is a policy designed to bolster the incomes of low-wage workers and offset some of the taxes they pay, providing the opportunity for families struggling to afford the high cost of living to step up and out of poverty toward meaningful economic security. The federal EITC has kept millions of Americans out of poverty since its enactment in the mid-1970s. Over the past several decades, the effectiveness of the EITC has been amplified as many states have enacted and expanded their own credits.

Although the 2017 Tax Cuts and Jobs Act has created a slew of problems, it is now clear that a mass migration of top earners out of higher-tax blue states is not one of them.

Reductions in critical state and local investments, including health care and education, would only exacerbate the economic crisis brought on by COVID-19 and worsen racial and income inequality for years to come. Higher taxes on top earners are among the best options for addressing pandemic-related state revenue shortfalls in the coming months.