Policy

Red states plan new income tax cuts ahead of potential recession

Republican lawmakers are planning to use much of the unexpected revenue filling state coffers to cut income taxes in bids to boost economic activity ahead of a possible recession.
Mississippi Gov. Tate Reeves has proposed ending the state’s income tax. (AP Photo/Rogelio V. Solis)

Republican lawmakers in several states want to use surplus revenue to cut income tax rates, hoping to boost economic activity ahead of a possible recession.

But some state leaders also are worried about enacting deep, permanent cuts that could make it harder to fund services such as schools and health care in future years. 

“There is definitely a strong commitment to continuing to cut taxes in the state,” said Utah Rep. Robert Spendlove (R), vice-chair of the Executive Appropriations Committee. Lawmakers want to send some of Utah’s $1.46 billion budget surplus back to taxpayers, Spendlove said. 

“However, on the other side, there is some concern that the economy is weakening,” he said. “We also don’t want to cut taxes too much and put the state in a precarious position. It’s a tough balancing act.”

A whopping 31 states cut taxes in 2022 and 18 states did so in 2021, according to Fitch Ratings, a credit rating agency. Lawmakers in both red and blue states embraced a range of reductions, from lowering income tax rates to cutting grocery taxes, enacting gas tax holidays and increasing tax credits for low-income families.

Lawmakers representing the two parties differed in their approach to lowering tax bills. Republicans tend to favor across-the-board tax cuts and Democrats tend to favor cuts and credits that benefit low-income people.  

States have so much revenue to spend that they can afford the cuts enacted over the past two years, at least in the short term, said Michael D’Arcy, director of U.S. public finance at Fitch Ratings. 

“There’s no credit downside, no rating downside for any of these states in the near term — really the next one to two years,” he said. Fitch’s economists expect a 2023 recession to be shallow and short-lived, he said.  

Still, lawmakers who slash tax rates too aggressively may struggle to balance future budgets, he said. “You could find yourself in a situation two or three years down the road, when your next round of cuts is phasing in — where if the economy starts to tank, you could be in trouble.”

Some of the most dramatic recent tax cuts were passed in red states. At least 16 mostly GOP-led states cut personal income tax rates, corporate income tax rates or both in 2022, according to Fitch Ratings. Many of those states reduced taxes on higher earners.   

In most cases, the rate cuts will phase in over several years and stop if certain revenue conditions aren’t met. Arkansas, Georgia, Idaho, Indiana, Iowa, Kentucky, Mississippi and Pennsylvania are among the states where rates will slowly drop, according to Fitch Ratings.

Tax policy experts expect to see fewer efforts to slash income tax rates this year. “There are additional states that are likely to cut individual income taxes in 2023,” said Jared Walczak, vice president of state projects at the Tax Foundation, a conservative-leaning think tank. 

“But the pace is unlikely to continue, both because of the changing economic conditions and because the states with the greatest desire to cut individual income taxes have already done so,” he said.

Florida, Texas and five other states don’t tax incomes at all, according to the Tax Foundation.  

So far, Montana Gov. Greg Gianforte (R), Mississippi Gov. Tate Reeves (R), North Dakota Gov. Doug Burgum (R) and Utah Gov. Spencer Cox (R) have all announced budget plans that include new income tax cuts.  

Some GOP leaders are arguing over whether lowering rates further makes sense. Mississippi Gov. Reeves wants to eliminate the income tax, for instance, but state senate leaders say one-time rebates would be more fiscally responsible

Reeves in April approved what he then called “the largest single tax cut in our state’s history.” The law eliminated income taxes on the first $10,000 Mississippians earn and lowered the tax rate on additional income from 5% to 4% by 2026.  

In Utah, Cox has proposed cutting the state personal and corporate income tax rate from 4.85% to 4.75%, expanding tax credits for low-income Utahns and approving $400 million in one-time income tax rebates.

This is on top of tax cuts Cox approved in February. That law cut income tax rates from 4.95% to 4.85% and created a tax credit for low- and moderate-income families, among other changes. Utah income tax dollars fund education and services for people with disabilities. 

GOP lawmakers want to keep lowering Utah income taxes. An interim committee last month advanced a bill that would cut the rate to 4.80%. Rep. Casey Snider (R), co-chair of the Revenue and Taxation Interim Committee, said at the time that the bill was a starting point. 

“Should this pass unanimously, it is not going to be one of those pieces of legislation that goes straight to the floor,” he said. “Having this cut rate at where it’s at now is just to show that we are going to take this seriously. But there will be other provisions added as this bill moves through the process.”

Utah Rep Joel Briscoe (D) voted against advancing the bill. He told Pluribus News he’d prefer tax cuts focused on low-income families.

“Instead of lowering the income tax, which principally benefits the very wealthy and corporations,” he said, “why don’t we use some of that surplus money to benefit the people most in need?”