BEYOND THE NUMBERS
More States Making Equity-Focused Tax Choices
This Tax Day, as many state legislatures end regular sessions and prepare to invest the American Rescue Plan’s fiscal recovery funds, lawmakers should note recent advances across the country in making state tax systems fairer. Several state legislatures are moving forward with transformative investments in communities and revenue systems to undo racial and economic inequities. Other states have a historic opportunity to follow suit by adopting measures that reflect these three principles of an anti-racist, equitable response to the pandemic:
- Target aid to those most in need due to the COVID-19 and consequent economic crises.
- Advance antiracist and equitable policies — both short- and long-term — to dismantle persistent racial, ethnic, gender, and economic inequities and other barriers that non-dominant groups and identities experience.
- Strengthen state revenue systems to sustain transformative, long-term investments in Black, brown, Indigenous, immigrant, and low-income communities.
The states with recent advances include New York, which took a number of equity-enhancing steps this year:
- Raising over $4.3 billion in revenue annually through temporary increases in the top personal income tax rate and corporate franchise tax rate and through decoupling from federal tax breaks for “Opportunity Zones.”
- Raising another $700 million-plus in annual revenue by legalizing adult-use cannabis and online sports betting.
- Creating a $2.1 billion excluded workers fund to aid immigrant workers who lost jobs or income during the pandemic but aren’t eligible for state jobless benefits or federal COVID-19 relief programs. The fund, the largest of its kind, will benefit about 290,000 immigrant workers, the Fiscal Policy Institute estimates.
Washington State reformed its tax code to aid those most in need:
- Creating a 7 percent tax on capital gains above $250,000 per year to help support child care, early learning, and public schools. The measure — which is expected to raise more than $500 million annually, almost exclusively from the wealthiest 1 percent of households — will create tens of thousands of new jobs and boost the state economy, according to the Washington Budget & Policy Center.
- Funding the Working Families Tax Credit (modeled after the federal Earned Income Tax Credit, or EITC) more than a dozen years after the credit was initially passed. This will provide over 400,000 families — including families that file taxes using an individual taxpayer identification number (ITIN) instead of a Social Security number — with rebates between $300 and $1,200, starting in 2023. The credit provides a good example of how a state without an income tax can support working families through an EITC.
New Mexico made similar strides toward an inclusive recovery:
- Raising the state’s Working Families Tax Credit from 17 to 25 percent of the federal EITC and expanding eligibility to immigrant ITIN filers, “Dreamers,” and workers ages 18-24 without children. Lawmakers also boosted the state’s Low-Income Comprehensive Tax Rebate, more than tripling the amount that goes back to families and tying its annual growth to inflation.
- Increasing the state’s surtax on health insurance premiums, which will raise an estimated $153 million per year to help roughly 187,000 residents under 65 afford health coverage.
- Advancing a ballot measure that will allow voters to decide whether the state should draw $200 million a year from the state’s Land Grant Permanent Fund for early childhood and K-12 education.
In addition to New Mexico and Washington State, three other states strengthened their state EITCs.
- California issued one-time, $600 payments to EITC recipients and to immigrants who file taxes with an ITIN who were excluded from previous federal COVID-19 relief payments and earn less than $75,000.
- Indiana raised its EITC from 9 to 10 percent of the federal credit.
- Maryland improved its EITC twice, expanding the credit for the next three years and then extending eligibility to immigrants who file taxes with an ITIN. Maryland’s EITC is now worth 45 percent of the federal credit for families with children, and 100 percent (up to $530) for those without children in the home. These changes will boost the credit for roughly 400,000 households and make 40,000 others newly eligible.
Also, lawmakers in Mississippi and West Virginia abandoned plans to eliminate the state income tax. Those misguided proposals would have worsened economic and racial inequities, both by tilting the state tax code even further to top earners and profitable corporations and by creating budgetary pressure for cuts to schools, higher education, health care, and other needs.
Unfortunately, some states took steps backward. Montana Governor Greg Gianforte recently signed two tax bills that disproportionately benefit wealthier Montanans and undermine the state’s ability to raise revenue by cutting the top income tax rate, collapsing the number of income tax brackets from seven to two, and eliminating several tax credits. Idaho enacted a similarly regressive tax bill. Kansas lawmakers overrode a gubernatorial veto to enact a tax cut package for multinational corporations and wealthy individuals that’s projected to reduce revenue by nearly $300 million over three years. And in more than a dozen states, lawmakers have announced plans to stop federal pandemic unemployment benefits, cutting off a vital resource to thousands of jobless residents.
State leaders have a chance now to reset. To realize the benefits of a full, inclusive economic recovery post-pandemic, they should look to the available models across the country of state budgets and tax systems that are prioritizing racial and economic justice.