BEYOND THE NUMBERS
Strong tax systems are a foundation for states to expand opportunity, promote fairness and equity, and foster broadly shared success. When policymakers prioritize efforts to protect and raise revenue, especially from wealthy taxpayers and corporations that don’t pay their fair share, it enables them to support essential investments such as high-quality schools and health services, clean water and reliable transportation, income support programs, and strong democratic institutions. Unfortunately, many states this year are choosing to cut taxes — often deeply — at an enormous cost in lost revenue and little to no benefit for families, communities, small businesses, and local economies.
This year, ahead of Tax Day, a few quick facts highlight how states can wield tax policy for the better, or for worse.
Wide swath of states enacting harmful income tax cuts
Many policymakers are undermining their states’ potential with costly, reckless tax cuts that primarily benefit wealthy people and corporations. States including Arkansas, Kentucky, Michigan, Montana, New Mexico, Utah, and West Virginia have already enacted harmful cuts this year, adding to the host of states that approved cuts over the prior two years. Combined, 24 states cut either their personal or corporate income tax rates — and in some cases both — in 2021, 2022, and 2023 so far.
Wave of tax cuts threatens state support for schools and vital services
More than half of state spending nationwide goes toward public education and health care. Many of the proposed or enacted tax plans in recent years carry a hefty cost in lost revenue, posing considerable harm to those vital services and others. For example, Kentucky’s recent tax cut plan — adopted in two phases over 2022 and 2023 — will cost $1.3 billion annually once fully phased in, which equates to more than what the state spends on its entire higher education system. Beyond harming current services, tax cuts also weaken policymakers’ ability to make additional, proactive investments such as universal free lunch or more affordable college.
Income tax cuts provide outsized gain for wealthy people and corporations
Large state income tax cuts also typically provide a meager direct benefit, at best, to most workers and families, and to people and places historically excluded from opportunities to thrive, such as communities of color and rural areas. That’s because most state and local tax systems hit those with lower incomes harder, so tilting state revenue systems further toward sales taxes and fees, or replacing a graduated income tax system with a flat income tax rate — as several states have recently done — only worsens the imbalance. For example, under West Virginia’s approved tax cut plan, the lowest-income tax filers would only receive a tax cut of about $20, while the wealthiest 1 percent (taxpayers making at least $467,000) would receive an average tax cut of around $10,000.
Uptick in “triggers” and “phase-ins” mask true harm of recent tax cuts
In many states’ plans, proponents of income tax cuts have included provisions for income tax reductions to be implemented several years after their enactment — policies commonly described as “phase-ins” or “triggers.” Such staggered cuts allow their supporters to skirt democratic accountability and obscure their policies' harmful effects by spreading them out over several years. Increasingly, for example in Arizona, such plans also include “march-to-zero” provisions designed to eventually eliminate income taxes entirely, which would shower tax cuts on wealthy people and corporations while decimating state budgets and services.
Many policymakers pushing tax cuts are recycling flawed claims
In many states over the past two years, tax cut proponents have used temporary revenue surpluses — fueled by economic recovery from the pandemic and supported by major federal relief efforts — as cover to enact permanent, structural tax changes they would have likely tried to advance regardless. Lawmakers pushing cuts recently have relied on many of the same arguments that motivated past tax cut experiments, including that dropping rates for profitable corporations and wealthy people will cause state economies to boom, or that tax cuts can help states retain or attract more residents. These claims aren’t supported by the evidence. For example, just prior to the beginning of the COVID-19 pandemic, the most common reasons people cited for interstate moves were job and family related.
States should prioritize raising revenue, boosting refundable tax credits
States have several alternative ways to take a better path. States should learn from the mistakes of the Great Recession by raising revenue, especially from wealthy people and corporations that aren't paying their fair share and shoring up their tax systems to protect jobs and vital services and to maintain a strong foundation for longer-term needs (as voter-approved measurers in Colorado and Massachusetts recently did). Another helpful step is for states to enact or expand refundable tax credits targeted to those shut out from opportunities. These include earned income tax credits and child tax credits, which ease the impact of state and local taxes on people paid low wages. State child tax credits have grown especially quickly in popularity of late, in part due to the sweeping success of the temporarily expanded federal Child Tax Credit enacted as part of COVID relief efforts, which drove down child poverty significantly across racial and ethnic groups.