Rogelio V. Solis/AP Photo
Mississippi Legislative Budget Office executive director Tony Greer points out financial totals during a joint legislative tax study committee hearing at the State Capitol in Jackson, Mississippi, August 25, 2021.
Tax cuts are high on the agenda in state legislatures across the country as a new year of lawmaking gets under way. In at least 20 states, including Colorado, Iowa, Michigan, and Mississippi, state lawmakers have proposed tax cuts that would overwhelmingly benefit wealthy households, force cuts to vital public services, and exacerbate racial and economic inequalities. Last year, 14 states with Republican-controlled legislatures slashed income taxes.
But this year’s proposals are proving to be uniquely harmful. According to Wesley Tharpe, the deputy director of state policy research for the Center on Budget and Policy Priorities (CBPP), there are a historically high number of proposals this year, as well as a wave of proposals calling for significant structural changes, such as eliminating entire taxes (in Mississippi) or moving from graduated income taxes to flat taxes (in Iowa). It’s not just Republicans proposing tax cuts, either. Several Democratic-controlled states have proposed tax cuts this year, including California, Colorado, New York, and Washington state. These blue-state proposals tend to be temporary measures or more targeted toward low- and middle-income taxpayers, for example lowering the sales tax or providing property tax rebate credits.
State lawmakers are also pointing to substantial, but temporary, budget surpluses to justify tax cuts, but these surpluses are “deceptive and fleeting,” says Neva Butkus of the Institute on Taxation and Economic Policy (ITEP), a Washington think tank. Twenty-three states lowered their revenue estimates compared to pre-pandemic levels, and 19 states counted delayed fiscal year 2020 tax collections as 2021 revenue, making current surpluses appear larger than they actually are.
The infusion of federal COVID-19 relief funds has spurred state governments to forge ahead with new rounds of cuts. The American Rescue Plan (ARPA) provided $195 billion to help states respond to the pandemic’s economic dislocations and to support low-income and communities of color. Congress explicitly prohibited the use of these funds to offset tax cuts, but a federal judge struck down that provision last November. Vindicated, the 13 states (12 of them have GOP-controlled legislatures) that filed the lawsuit are doing exactly that.
States can’t cut taxes and invest in programs.
Last month, the Mississippi House passed the Mississippi Tax Freedom Act of 2022. The bill would eliminate the state individual income tax, increase the sales tax rate, and implement other minor tax code changes. Eliminating the individual income tax alone would cost approximately $1.8 billion, or 32 percent of the state’s total revenue. (A more modest state Senate proposal is expected to pass in the coming days, and a battle between House and Senate Republican leadership is taking shape.)
The House bill passed with bipartisan support, thanks to the addition of two progressive proposals within the larger bill: reductions in the sales tax on groceries and the tax on vehicle registrations. “It is hard to vote against the car tag reduction,” Rep. Bryant Clark (D-Pickens) told Mississippi Today, as the proposal is broadly popular among constituents.
But low- and moderate-income Mississippians are not the primary beneficiaries of the bill. Kyra Roby, a policy analyst at One Voice Mississippi, a nonprofit civic engagement organization, estimates that the bill would save the state’s highest earners approximately $30,000 per year, while the state’s lowest earners (making less than $19,000) would experience an overall tax increase. The reductions in the grocery tax and vehicle registration levy are not enough to offset the increased sales tax rate, as poor families pay a much higher share of their incomes in sales taxes.
These types of proposals mislead voters, shut down debate, and mask greater problems. Mississippi already has the highest poverty rate in the nation. Over 200,000 Mississippians remain uninsured because the state has not expanded its Medicaid eligibility under the Affordable Care Act. State tax cuts are also enacted at the expense of local governments, which are already struggling. With no other way to raise revenue, municipalities will be forced to increase fines and fees, according to ITEP’s Kamolika Das. These changes are always regressive, falling most heavily on low-income residents and people of color.
Proponents of tax cuts claim the rollbacks will boost state economies, attract new businesses and families, and support residents in need. But CBPP researchers found that the nine states with the highest top marginal income tax rates had slightly faster economic growth in the last decade compared to the nine states that do not have income taxes.
States can’t cut taxes and invest in programs. “This is unsustainable and will lead to deep spending cuts to balance the budget in the future,” says Das. Tax cuts in the 2010s, particularly in Kansas, bore out those fears. Reduced revenues led to inadequate education funding, school closures and layoffs, rising tuition at state colleges and universities, and brutal cuts to other public services. With billions in ARPA funds flowing into their coffers, state lawmakers have an unprecedented opportunity to think creatively about helping those residents who have been hit hardest by the pandemic; instead, they are setting people up for longer-term hardships.
