Tax cuts in Northeast central to fiscal 2024 state budgets

Despite wide expectations for declining revenues, big-ticket tax cuts were on the agenda in state legislatures across the Northeast during the most recent budget negotiation periods.

With a slowdown in economic activity expected going into fiscal 2024 after a strong post-COVID rebound, almost every state in the region passed or is still negotiating tax cuts that proponents say are timely and justified by vastly improved bottom lines.

Opponents, however, argue predictions for slipping revenues and obligations pending on existing debt in a less-than-ideal economic climate make it a bad time to shave billions from state coffers. In addition, it’s harder to raise taxes once cuts are made, experts say.

While the trend is one seen nationwide “because things are good at the moment,” said Richard Auxier, senior policy associate at the Urban-Brookings Tax Policy Center, the northeast in particular “is a region with elected officials that are open to it.” 

“We’re still not that far away from the pandemic for anyone to think we’re at the new normal now,” he said. “Anytime any state passes a large, permanent tax cut, you’re possibly making things more difficult for yourself during the next budget crunch.”

Forty-three states adopted tax cuts in the past two years, according to the Tax Foundation, and in the Northeast, packages have varied in size from proposed adjustments to select tax credits, as floated in Pennsylvania, to income rate reductions passed in New York and Connecticut’s most recent budgets. In New Jersey and Massachusetts, where revenues rose rapidly across the board, in some cases to historic highs, massive overhauls of tax code were undertaken.

Post-lockdown, most states saw robust growth in “all major tax streams” the Pew Research Trust found, with increases driven by strong employment growth, rising wages, high levels of short-term government aid to individuals, and unprecedented federal support, which led to “quicker-than-anticipated” recoveries in the stock market.

Tax revenue rebounded five times faster than the recovery following the Great Recession, “beating what many states and economic experts had initially projected,” Pew said in a report. A funding environment flush with federal dollars also offered “extra breathing room.” This left states with more than enough to capital cover pandemic-related funding gaps and bankroll a bevy of infrastructure work while leaving them with surplus enough to pay down debt and fill coffers to the brim.

“Once you’ve made your savings, and you’ve made your investments, and you’ve still got money coming in, I understand where politicians would want to use some of that money to reduce the burden on their residents,” Auxier said.” I think the question is one, how do you do it?”

In New Jersey, where major tax cuts came along with passage of the state’s largest budget ever, Gov. Phil Murphy pointed to the state’s improved fiscal footing.

“We are accomplishing all of this in a fiscally responsible way,” Murphy said after signing the $54.3 billion spending plan. “This budget continues to fully deliver on our commitments to our pension payments and school funding, while also maintaining a healthy surplus.”

The budget, passed hours before a July 1 deadline, features an $8.3 billion surplus and $5.4 billion in new spending while paying the state full annual pension payment for the third year in a row. It directs more than $2 billion toward retiring debt and avoiding new issuances, and boosts the states Debt Defeasance and Prevention Fund to $2 billion.

It also includes major relief provisions for property and income taxes, seniors and renters, and allows for a reduction of the state’s corporate business tax; all measures expected to shave billions from annual revenues well into the future according to official estimates.

In Massachusetts, similar positive metrics were cited as some of the chief forces driving a major package of middle-class tax cuts proposed by first-term Gov. Maura Healey and approved later by state senators along with their $56 billion fiscal 2024.

The budget and $742 million tax cut package, which double and expands the state’s child tax credit, provides homeowners and renters relief and expands a tax credit program for developers working on new housing, helps Massachusetts “meet this moment” Healey said in a statement.

“This proposal centers affordability, competitiveness, and equity each step of the way, delivering relief to those who need it most and making reforms that will attract and retain more businesses and residents to our great state,” the governor said.

Opposition to those bills in both states echoed wider complaints heard across the Northeast and nation, mainly from minority Republican lawmakers in Democratic-controlled statehouses who question the timing of the cuts and consequent revenue loss amid falling figures and an uncertain economic future.

The geopolitical conflict in Russia and the Ukraine’s effect on post-pandemic markets have also helped to fuel rising inflation, which reached a high 8.58% last year, and resulted in an aggressive push by the Federal Reserve to head off a potential recession with a series of interest rate hikes.

Those effort have helped drop that figure to 4.05%, which is still twice the standard benchmark, while shaking markets at the same time

Some opponents also cited needs still pending from existing debt amid decades of increased issuance; since 2013 New Jersey has sold $5.7 billion of bonds, Massachusetts $37 billion, New York $2.8 billion, Pennsylvania $13.5 billion, and Connecticut $30.5 billion , according to Refinitiv. However, these are state-only volume totals and don’t include sales from their various agencies, such as the Dormitory Authority of New York, which has issued $67.8 billion of debt in the past decade.

While many states carrying out cuts are doing so from a place of much-improved finances, economic swings can happen quickly, Auxier said, and revenues specifically from capital gains income taxes, can be “volatile,” which could present risks for states with debt burdens.

Among the myriad problems facing states passing revenue-draining tax cuts, federal funding is rapidly drying up after having created one of the most peculiar markets in memory, the Urban Institute said in a report.

“It took decades for Congress to deliver a comprehensive infrastructure bill and a robust response to climate change, yet in a twist of fate both landed during one of the most unusual macroeconomic environments in recent history, with historically low unemployment combined with high inflation,” the report said. “Now, all levels of government and the private sector must confront a set of industrial, fiscal, and labor market challenges that threaten the impact of the new laws.”

States of the Northeast have an advantage compared to some national counterparts that have legal restrictions making it more difficult to reinstate taxes should if be necessary, helping to avoid “a situation where you provide a very large tax cut to a group and then have to come asking for it back,” Auxier said.

“Politics can make things challenging but the math is pretty simple,” Auxier said. “The question, as always, is what will the next recession look like?”