Alarm over states slashing income taxes

Budget surpluses fattened by gluts of federal spending have 25 state government slooking at income tax cuts, which has some public finance experts concerned.

The comments came during a media call hosted by the Center for Budget and Policy Priorities and the Institute on Taxation and Economic Policy on Thursday.

“These cuts are going to have long-term implications for states’ abilities to fund core services,” said Aidan Davis, state policy director, Institute on Taxation and Economic Policy. “The end result is either going to be higher taxes for poor people in the middle class, or big cuts to services that we all use, and we all count on.” 

The panel of experts also included Wesley Tharpe, deputy director of state policy research, Center on Budget, and Policy Priorities. Tharpe believes the political allure of tax cuts is purely mythical. 

“I think the move to reduce taxes on both sides of the aisle is evidence of how deeply ingrained some of these stale, outdated, non-evidence-based tropes around tax cuts are,” he said. “The track record from what we’ve seen nationwide, as well as expert research really don’t support those claims.” 

Flat income tax rates are being explored in North Dakota and Ohio. Arkansas, Indiana, Louisiana, Mississippi and West Virginia are weighing eliminating their state income taxes. Kentucky recently passed legislation cutting the state income tax from 5% to 4.5% with Republican lawmakers eyeing an eventual total elimination. A dozen more states are considering property tax cuts. Arizona has gone the flat tax route while Republican Gov. Greg Abbott is calling for disbursing at least half of Texas’s $27 billion surplus to reduce property taxes. 

Texas and Florida stand apart as high-growth areas with no income tax and serve as a beacon to other states considering similar moves. Tharpe doesn’t believe the hype.

“Other states around the country oftentimes have a misguided view that by emulating the tax policy of those states, they’re going to be able to see the same kind of economic and population growth success,” he said. “Tennessee is not going to be able to emulate Florida because they don’t have its beaches.”  

Texas is abundant with natural resources which helps defray budget shortfalls while Florida relies on tourism to fill the gap. Hawaii would also like to shift some of its proposed income taxes to tourists. 

According to the CPBB, the surpluses the states are intent on returning to taxpayers are financial mirages created via transfer payments that are blended into state revenue streams. Transfer payments are subsidies, which includes stimulus money where no goods or services get exchanged for the funds. 

In numbers crunched by CBPP last year, personal income in Iowa grew 5.9% percent in 2020, even though earnings from work grew just 1.9%. The gap is attributed to a 28% jump in transfer payments. General fund revenues in the state were projected to grow $150 million next year but phased-in tax cuts will result in a $1.9 billion rise in costs over the next five years.