Trend: States Are Cutting Taxes

A recent CNBC article^[1] reports that in 2021 twenty-nine states and the District of Columbia cut taxes due to budget surpluses. Predominantly, they have cut income taxes.

Budget surpluses were due to several factors, including:

• States that extended tax deadlines from April to July 2020 pushed income into fiscal year 2021, which begins July 1 in most states.
• High-income taxpayers continued to work and pay taxes during the pandemic.
• The American Rescue Plan (which was signed in March 2021) allocated $195.3 billion in federal support for states (which is the equivalent of around 20% of annual tax collections).^[2]

Tax Foundation reports "a flurry of activity on taxes" by states:

Individual income tax rate reductions are the most common proposal. At present, 13 states have legislation worth watching that would cut individual income tax rates: Colorado, Idaho, Indiana, Iowa, Michigan, Mississippi, Missouri, Nebraska, New York, Oklahoma, South Carolina, Utah, and West Virginia. Additionally, nine states—with significant overlap—have noteworthy proposals to cut corporate income taxes: Colorado, Idaho, Indiana, Iowa, Kansas, Michigan, Missouri, Pennsylvania, and Utah. Both lists are likely to grow as sessions continue.

Meanwhile, five states—Connecticut, New Mexico, Tennessee, Washington, and West Virginia—have legislation or governor’s proposals to cut sales tax rates. While most, but not all, of the proposals to cut income taxes are championed by Republicans, all five serious efforts to cut sales taxes have come from Democratic lawmakers. Both Republicans and Democrats, however, have proposed exempting groceries from sales tax bases, or expanding current exemptions, in Alabama, Colorado, Illinois, Kansas, and Mississippi.

Although New York and the District of Columbia raised income taxes in 2021, New York's Gov. Kathy Hochul (D) is proposing tax cuts for middle-income taxpayers.^[3]