BEYOND THE NUMBERS
1 in 5 States Slashed Income Tax Rates in 2023, Deepening Already Worrisome Trend
This year, 1 in 5 states reduced income tax rates or allowed automatic tax cuts to take effect, decisions that continue a three-year trend of big, mostly regressive tax cuts that will carry a heavy cost for state revenues, families, and communities both now and over time.
A far better trend would be for more states to follow the few that chose an opposite path, such as by enacting more targeted cuts or protecting and raising revenues to support public investments like affordable child care and universal school meals.
In 2023 so far, nine states — Arkansas, Connecticut, Indiana, Kentucky, Montana, Nebraska, North Dakota, Utah, and West Virginia — have enacted policies to reduce personal or corporate income tax rates. A tenth state, Michigan, will see rates fall due to an automatic “trigger” mechanism passed nearly a decade ago.
Though some of the cuts are worse than others, details from two showcase the general impact and trend:
- In Arkansas, policymakers approved a push by Gov. Sarah Huckabee Sanders to slash personal and corporate income tax rates, worsening a decade’s worth of cuts that already costs that state about $1 billion each year. About 80 percent of the benefits from this year’s personal income tax cut will go to that state’s richest 20 percent, while 80 percent of the corporate tax cut will likely leave the state entirely.
- And in West Virginia, Gov. Jim Justice signed a massive personal income tax cut that will cost more than $800 million each year starting in 2025 — or nearly twice what it might cost to eliminate child poverty in that state. Meanwhile, the plan could eventually eliminate that state’s personal income tax entirely, if certain triggers designed to further undermine the income tax are hit. If full elimination were in effect today, West Virginia would face a $2.2 billion budget hole, or about what it spends now on all public education.
This year’s cuts build on a host of similar policies approved over the past two years. Combined, 26 states have now reduced income tax rates in 2021, 2022, or 2023, and several states have done so multiple times. In five of those states, policymakers also structured the cuts to take effect as a so-called “flat tax,” making them especially regressive. Applied at the same rate on all taxable income, flat taxes may sound fair at first, but in effect they only tilt state taxes further in favor of the wealthy, once sales taxes and other, more regressive revenue sources are accounted for.
Together, the recent tax-cutting spree will cost states tens of billions of dollars in lost revenue over the next several years. That will mean real harm to state revenues, services, and economies now and down the road, as a forthcoming CBPP report will detail. Overall, the cuts will also provide a windfall to wealthy people and corporations, further weakening our democracy by tilting the scales of power even more toward those who already have it.
One bright spot this year? Kansas, where a massive tax cut fell narrowly short after Gov. Laura Kelly chose to veto the measure, citing its “reckless” financial costs and outsized benefit to wealthy taxpayers. The state legislature upheld her veto by a single vote.
Another emerging bright spot is Connecticut. Even though state lawmakers chose to reduce personal income tax rates and thereby weaken revenues, they did so in a relatively modest and targeted way that will mostly benefit low- and middle-income taxpayers, rather than people at the very top.
Looking ahead, policymakers nationwide should consider the harm this recent round of cuts will cause, and instead follow the example of states where policymakers prioritized revenues and the vital public services they support.
Take Minnesota and Washington, where state leaders rejected the call for tax cuts altogether, instead raising and protecting revenues to reinforce current public investments and fund new ones, too, such as universal school meals in Minnesota and upgrading aging school buildings in Washington.
Over the coming years, states that have slashed taxes can take several concrete steps to minimize the coming damage to their revenue systems. Ideally they’d reverse cuts wherever possible, but at minimum they should choose not to dig the hole even further. Meanwhile, policymakers everywhere can view the latest round of fiscal recklessness as a cautionary tale, and instead move in a different, better direction to raise the kind of bold, sustainable revenues states need to fund a brighter future for us all.