It’s a Big Year for State Tax Cut Proposals

Tax cuts, tax cuts, tax cuts. Everyone in state capitols is talking about tax cuts these days, as elected officials facing voters this fall try to curry favor with a restless electorate.

But getting those tax breaks into law, even when state treasuries are flush, is no easy task, with politicians from all corners coming up with ideas and clamoring for credit. While gas tax relief is especially salient, lawmakers are exploring plenty of other options, too. 

In general, Republican officials sought to reduce income taxes while Democrats tried to lower taxes on everyday items. In Iowa, for example, Gov. Kim Reynolds championed a measure that replaced the state’s progressive income tax with a flat 3.9% rate.

Georgia Gov. Brian Kemp, a Republican who faces stiff challenges in both the primary and general elections, signed into law a $1.6 billion plan that would send refunds to people who paid taxes in 2020 and 2021. The checks could be sent out in a matter of weeks, as the primary contest approaches in May.

Indiana Gov. Eric Holcomb signed into law a seven-year plan to lower the state’s income tax, although Hoosiers wouldn’t start seeing savings until 2023 and future rate cuts would depend on the state’s financial health. The Republican governor initially opposed significant tax breaks that House Republicans were pushing, but he relented after seeing promising revenue numbers.

Tax cuts were one of the top priorities of Idaho Gov. Brad Little, a Republican who faces several opponents in the May GOP primary. Last month, he signed a bill that gives Idahoans a one-time rebate and that includes future reductions in income taxes starting in July.

It was one of several victories he secured with the Republican-led legislature this year.

“Never in my life did I think we would achieve the ‘trifecta’ – historic tax relief, historic education investments, and historic investments in transportation in one year. Some say, ‘You can’t have your cake and eat it, too,’ but clearly, we are proving them wrong here in Idaho,” Little said in a statement.

Democrats Push Varied Relief Ideas

In Michigan, on the other hand, Democratic Gov. Gretchen Whitmer last week vetoed a $2.5 billion tax cut package that Republicans in the legislature sent her. The far-reaching proposal would have cut the state’s income tax rate, created a child tax credit and expanded tax exemptions for seniors. Whitmer also rejected a move to suspend the state’s gas tax. She said those policy changes would have put  the state’s finances at risk in future years.

That didn’t sit well with James Hohman, the director of fiscal policy for the conservative Mackinac Center for Public Policy.

“A frank summary of the state’s fiscal situation is that state revenue has grown a lot, is expected to continue growing, and that lawmakers are awash in cash,” he wrote after the veto. “Lawmakers can afford to lower taxes. The state government is not in danger of insolvency, nor would it be unable to operate with the tax reduction, despite the governor’s claims.”

But Whitmer countered with an idea of her own: suspending the sales tax on gasoline. Michigan is one of a handful of states that both collects the per-gallon fuel tax on motor fuels and applies the broader sales tax for retail goods on gasoline.

“A short-term pause is a fiscally-responsible action we can take that will provide drivers relief at the pump right now – not next year – while also protecting funding for road repairs and saving tens of thousands of good-paying construction jobs,” Whitmer said in a statement. “While I am open to negotiating on alternative proposals, I will not support legislation that jeopardizes road repairs, construction jobs or funding for local schools.”

The prospects of her alternative are uncertain. Senate Majority Leader Mike Shirkey, a Republican, said he “cannot wait to finally put a stake in the heart of the sales tax on gas.” But House Speaker Jason Wentworth, another Republican, seemed cool to the idea, the Detroit Free Press reported, because it wouldn’t be a big enough break.

Another Democratic governor is trying to convince a Republican-led legislature to get on board with her idea for a tax break in Kansas. Gov. Laura Kelly wants to eliminate the state’s sales tax on groceries, but GOP lawmakers want to phase out the food taxes instead of getting rid of them right away.

Gov. Phil Murphy of New Jersey, a Democrat who won re-election last year, hopes the state’s flush financial system could help ease the burden of the state’s notoriously high property taxes. He’s backing a property tax relief initiative that would apply to 1.8 million households, including homeowners making up to $250,000 a year and renters making up to $100,000 a year.

“This program will provide direct property tax relief to households regardless of whether they own or rent,” Murphy said while unveiling the proposal. “While the state does not set property taxes, we believe that we must take action to offset costs and make life in New Jersey more affordable.”

Murphy’s proposal comes after the state’s congressional delegation failed to reverse a change in the federal tax code that hit residents in New Jersey and other states with high property taxes particularly hard.

A few outgoing Republican governors are looking to pass tax cuts in their final months in office.

Massachusetts Gov. Charlie Baker, for example, is pushing a $700 million plan to reduce estate and capital gains taxes, while offering more relief for seniors, parents using child care and people paying rent. The Democrats who control the legislature there, though, are still debating whether to adopt Baker’s plans or come up with their own.

In Arizona, Gov. Doug Ducey could summon lawmakers back to Phoenix to preserve income tax cuts that they passed with his support last year. The idea would be to add even more tax relief, reported the Arizona Mirror. The changes would short-circuit a November ballot measure to repeal last year’s tax breaks, although opponents would still have a chance to put any changes made this year on the ballot as well.

This year’s enthusiasm for tax breaks comes after legislatures in 14 states reduced income taxes in 2021, according to the Americans for Tax Reform, a conservative group that pushes for lower taxes.

Critics of the latest tax cut proposals—mirroring the types of concerns raised by Whitmer, the Michigan governor—warn that slashing taxes now could lead to financial difficulties down the road, even though state budgets are currently running strong.

“Enacting permanent tax cuts in response to short-term conditions would create problems in just a few years that could force states to cut education, health care, and more,” Ed Lazere, a senior fellow with the left-leaning Center on Budget and Policy Priorities, wrote earlier this month.

“Some of the proposed tax cuts far exceed the state’s expected revenue growth, which means budget holes could open up soon,” he added.