March 3, 2022
State Policy Analyst
March 3, 2022
Income taxes are the backbone of most state budgets, but you wouldn’t gather this fact based on the current trend to cut or eliminate them. A recent, cheerful Wall Street Journal op-ed from anti-government advocate Grover Norquist offers a clear sign that tax-cutting states are taking the wrong approach. The long-time proponent of anti-tax pledges wrote favorably about the legislative and gubernatorial plans to cut income tax cuts across the country. As usual, he failed to address that income taxes support state investments in education, infrastructure, health care and other important public services.
While Norquist’s op-ed celebrates all the states proactively working to end their income taxes, he disregards research and cautionary tales that show state tax cuts do not beget economic growth. In reality, states that have cut their personal income taxes have seen unimpressive results, if any at all.
States are flush with cash right now and some lawmakers are using this opportunity to score political points. What many aren’t saying is that cutting taxes now will create structural imbalances that either make it that much harder to raise revenue during tougher economic times or will force regressive sales and other tax increases that fall more heavily on low-income households. Most people don’t want to live in a state where a wealthy business owner pays a lower tax rate than a teacher’s aide. This is not a laudable policy goal. Of course, there’s no mention of this in Mr. Norquist’s op-ed or in statements from lawmakers championing lopsided tax cuts.
There is a multitude of uses for surplus revenues in this moment, especially considering some states never fully restored spending after the Great Recession. Roads are crumbling. Schools need funding to pay teachers and buy books. Hospitals need aid to stay open. The political success of cuts to personal income taxes for anti-tax proponents will result in long-term failures.
The design of these tax cut plans is also troubling. Many are structured to phase out the income tax over a certain period and depend on revenue gains. These triggers may be unattainable down the line because the revenue gains states are currently experiencing are likely not to last. And if attained in future years these triggers would require deep cuts to spending, increases to other (more regressive) taxes—resulting in a tax shift—or some combination of the two. So, while anti-tax advocates are praising legislative tax-cut proposals and victories, their long-term strategy of straight income tax elimination may not come to fruition. These legislative tricks are just a trojan horse for establishing more anti-tax sentiment across all fifty states.
State policymakers should reconsider their inclination to cut income taxes for the sake of stabilizing public finances and deepening a commitment to a fair tax code. Policymakers should resist following the beliefs of anti-tax supporters for temporary political points. Mr. Norquist writes in WSJ, “Lawmakers in Washington could learn from these (state tax cut) examples.” I agree. Federal policymakers should learn that fairly raising revenue, not top-heavy tax cuts, is the best way to support programs that grow the economy. State policymakers should learn that, too.