Just Taxes Blog by ITEP

State Rundown 1/13: The Tax Cuts Cometh, But There Is a Better Way

State Rundown 1/13: The Tax Cuts Cometh, But There Is a Better Way

January 13, 2022

ITEP
.ITEP Staff

As expected, with the start of many new legislative sessions around the country, lawmakers have introduced a slew of tax cut plans following better-than-expected budget outlooks that have, so far, weathered the impact of the pandemic and were further buoyed by federal relief dollars. While the cuts vary in shape and size the most egregious, like Mississippi’s plan to phase out the income tax and increase the sales tax on most items and Idaho’s personal and corporate income tax cut, are doing exactly what ITEP’s Neva Butkus said states should avoid doing—focusing on short-sighted tax cuts that will primarily benefit the rich while doing little to improve their economies. Even South Dakota—a state that already relies heavily on the regressive sales tax—is trying to get in on the action by eliminating their bingo tax. Luckily, our own Aidan Davis has a list of options that lawmakers can choose from if the desire to use their surpluses for cuts gets too strong (looking at you Gov. Polis). The point is, however, that there is a better way. Whether it’s improving college affordability, as ITEP’s Brakeyshia Samms recommends, or creating a single-payer healthcare system like California wants to do for its residents, lawmakers should focus on using surplus funds to tackle problems from the bottom up and not the other way around.

Major State Tax Proposals and Developments

  • Yesterday afternoon, the MISSISSIPPI House passed an incomprehensible and irresponsible bill that would gradually eliminate the state income tax, increase the sales tax on most retail items from 7 percent to 8.5 percent, and reduce the tax on groceries to 4 percent. An amendment to include a 15 percent state Earned Income Tax Credit (EITC) was unsuccessful. When fully phased in, ITEP found that nearly a third of the net tax change would benefit the top 1 percent of earners and nearly half would benefit the top 5 percent. Not only would the lowest-income residents and seniors on fixed incomes pay higher taxes under this proposal, it would leave the state with over $1.5 billion less revenue to fund key priorities. – KAMOLIKA DAS
  • A major CALIFORNIA health care proposal will attempt to create and fund the nation’s first single-payer health care system. The plan advanced from its first legislative committee this week. If approved by the full legislature and voters, it would provide universal health care funded by a progressive payroll tax, a new surcharge on high-income households (starting at about $150,000), and a gross receipts tax on business receipts over $2 million. While anti-tax interests are decrying the proposal as a crippling tax increase, most families would save money on net because their savings from eliminating current health care costs would outweigh their new taxes. – DYLAN GRUNDMAN O’NEILL
  • CONNECTICUT Gov. Ned Lamont is using federal funds to retroactively increase the state EITC to 41.5 percent of the federal credit for the 2021 tax year, boosting incomes for middle- and low-income working families. Advocates are applauding the move as a targeted use of current funds and pushing Lamont and the legislature to permanently increase the credit. – DYLAN GRUNDMAN O’NEILL
  • In IDAHO, lawmakers in the House Revenue & Taxation Committee advanced Gov. Brad Little’s major income tax cut bill, that would consolidate and reduce rates and brackets, reduce the corporate income tax from 6.5 percent to 6 percent, and provide a one-time rebate of a minimum of $75. – MARCO GUZMAN

Governors’ Annual Addresses and State of State Speeches

  • ALABAMA Gov. Kay Ivey delivered the State of the State address on Tuesday evening, outlining her priorities for spending pandemic relief dollars such as building correctional facilities, water and sewer infrastructure, and a 4 percent pay raise for state employees. While Gov. Ivey did not explicitly mention taxes in her address, lawmakers have pre-filed legislation to increase the standard deduction and offer tax cuts to retirees.
  • ARIZONA Gov. Doug Ducey made a commitment to cutting taxes in his 2022 State of the State, explaining bluntly, “We will cut taxes.” There were no new details, however, on any upcoming proposals.
  • COLORADO Gov. Jared Polis mentioned, in his 2022 address to the state, that he wants to help residents save money by cutting taxes. Though he didn’t provide specific plans the governor noted that the cut would not come at the expense of teachers and law enforcement.
  • During the FLORIDA State of the State address, Gov. Ron DeSantis touted a $99.7 billion spending plan that’s heavily bolstered by federal relief funds while he simultaneously criticized Washington for providing those same funds. The governor’s spending plan includes a 25-cents-a-gallon reduction for six months that would cost $1.1 billion. The Florida Policy Institute argues that the state should instead focus on structural change that would benefit the state’s lowest earners.
  • In his State of the State address, GEORGIA Gov. Brian Kemp recommended a few welcome changes such as extending postpartum Medicaid and funding state education. However, he has also proposed $250 to $500 tax rebates that would total $1.6 billion. Lawmakers may introduce larger cuts this session such as cuts to the top rate or a flat tax.
  • IDAHO Gov. Brad Little committed to providing over $1 billion in tax cuts over the next five years in his 2022 State of the State speech.
  • NEBRASKA Gov. Pete Ricketts used his speech to call for tax cuts, predominantly for upper-income Nebraskans. In addition to increasing property tax rebates and accelerating the expansion of Social Security tax cuts for more higher-income households, he claimed the state “must” cut its top income tax rate while mischaracterizing the people who would benefit from such a rate cut (the majority of the benefit would go to the richest 5 percent of state residents).
  • As expected, NEW YORK Gov. Kathy Hochul’s first State of the State address laid out a moderate agenda with no new progressive revenue proposals and a mix of tax reductions, including a targeted $1 billion property tax rebate, the acceleration of previously enacted income tax rate cuts, and expansion of a tax break for business owners.
  • SOUTH DAKOTA Gov. Kristi Noem proposed eliminating the state’s bingo tax in her recent address to the state.

State Roundup

  • CALIFORNIA Gov. Gavin Newsom’s budget proposal included extending the state’s Medi-Cal program to all low-income residents regardless of immigration status and creating a “gas tax holiday” that would delay an inflation-based increase scheduled to occur in July. An additional “Golden State stimulus check” is a possibility as well but details were not included in Gov. Newsom’s proposal.
  • IOWA Gov. Kim Reynolds has proposed a bill that would rid the state of its progressive income tax brackets and replace it with a 4% flat rate.
  • The KANSAS legislature is expected to debate a bill to exempt Social Security benefits from state income tax as well as an elimination of the state’s sales tax on groceries. Tax relief in the form of one-time rebates will also be discussed.
  • House Republicans in KENTUCKY have filed a two-year state budget a week before Democratic Gov. Andy Beshear is scheduled to present his budget. The goal of the unprecedented House budget bill is to pass it quickly and focus on tax changes, including considering replacing income taxes with a higher sales tax.
  • MARYLAND Gov. Larry Hogan has also proposed spending approximately $4.6 billion in tax breaks. On the plus side, part of the bill would specifically target low-income residents by making permanent the enhanced state EITC. But the far less targeted and more expensive part of the bill would eventually eliminate all state retirement taxes.
  • NEBRASKA lawmakers advanced a bill to reduce the effectiveness of the state’s inheritance tax by lowering its rates and increasing exemptions. The tax is already very modest and paid by very few, mostly very high-income, Nebraskans.
  • NEW JERSEY Gov. Phil Murphy spent a good portion of his State of the State address discussing the state’s push to advance tax fairness. While New Jersey’s tax system is far more equitable than other states, the governor took a step in the opposite direction yesterday by expanding film and digital media tax credits.
  • A NEW YORK legislator hopes to enact single-payer healthcare in the Empire State this year, though some other lawmakers see it as a longer-term goal.
  • UTAH lawmakers are expected to debate several proposals to cut taxes over the span of the 45-day session. Plans range from small to modest income tax rate cuts, and the governor’s plan to eliminate sales tax on groceries will also be considered.
  • WEST VIRGINIA Gov. Jim Justice was unable to deliver his State of the State address in person, but his illness did not stop him from calling lawmakers into a special session to quickly pass new tax incentives for large capital and labor-intensive industrial manufacturers.

What We’re Reading

  • A recent editorial questions the popularity of North Carolina’s decade-long tax cutting efforts, arguing that investments are more important and may elicit a more positive public reaction than tax cuts that largely benefited corporations and the state’s top 20 percent of earners.
  • The West Virginia Center on Budget & Policy questions the wisdom of cutting taxes with a temporary surplus: “And when so many needs remain to be addressed — such as unaffordable higher education, lack of support for working families, underfunded schools, and tens of thousands of children living in poverty — then what good is a budget surplus?”
  • The Urban-Brookings Tax Policy Center released a new report, accompanied with a short blog post, that explored how states allocate revenues from speeding ticket fines or fees. They found that in 43 states some of the revenue is sent to courts or law enforcement funds.
  • The Washington Post explores the socio-economic and racial divide between the incomes of Louisiana State University’s new football coach, Brian Kelly, and the predominantly Black communities living in the shadow of LSU’s Tiger Stadium. Kelly recently signed the most valuable contract in the history of college football and is guaranteed $9 million a year – or $24,657 every day. The average household near Tiger Stadium averages just $24,865 a year.
  • Route Fifty reports on public pension funds increasingly investing in cryptocurrencies, as well as some of the problems state and local governments are encountering relating to cryptocurrencies.

 

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