States rush to cut taxes as inflation soars, budgets swell from pandemic aid

"States literally have more money than they know what to do with," said Committee for a Responsible Federal Budget's Marc Goldwein.

Updated: February 23, 2022 - 5:55am

Both blue and red states nationwide are cutting taxes as they bring in more income tax revenue while inflation surges.

States have received half a trillion dollars in COVID-19 relief funding since 2020. Additionally, an analysis from Pew shows "states raked in about 19% more tax revenue from March-November 2021 compared with the same period in 2019." 

States are debating cutting various types of taxes ranging from personal income to property. The nonprofit Tax Foundation reported earlier this month that "13 states have legislation worth watching that would cut individual income tax rates: Colorado, Idaho, Indiana, Iowa, Michigan, Mississippi, Missouri, Nebraska, New York, Oklahoma, South Carolina, Utah, and West Virginia."

Idaho has seen the largest tax revenue increase of 37% from March-November 2021 compared to the same 2019 period.

Nine states — Colorado, Idaho, Indiana, Iowa, Kansas, Michigan, Missouri, Pennsylvania, and Utah — are seriously considering cutting corporate income taxes. The Tax Foundation reported that five states — Connecticut, New Mexico, Tennessee, Washington, and West Virginia —have proposals to cut sales tax. 

Even leaders who previously supported tax increases have since changed their opinions. For example, Gov. J.B. Pritzker (D-Ill.) is now calling for $1 billion in tax cuts. 

The conservative Illinois Policy Institute reports that Pritzker has added more than $5 billion in increased or new taxes and fees since he took office. Pritzker, who is running for reelection in 2022, called the tax cuts a way to "alleviate" the pressure of inflation, according to Politico.

Inflation rose by 7.5% in 2022, the highest year-over-year increase since 1982.

Missouri is currently considering a constitutional amendment to cap the state income tax at 5.9%, slightly higher than the current tax rate. The Show Me State is also weighing a bill to eliminate its grocery tax

Iowa is looking at gradually eliminating its tax brackets and adopting a flat 4% income tax. The state's budget last year was $8 billion, but Iowa's government is now figuring out how to spend more than $2 billion in surplus and reserve money, Pew reports.

"It's cutting taxes, but it's also controlling our spending," Iowa Senate Majority Leader Jack Whitver (R) told Pew. "The states that I think have had struggles with tax reform — they didn't control their spending."

Whitver said the tax cuts will help Iowa compete against other states.

"The competition is fierce for citizens and for jobs," he told Pew. "And we want to make sure that Iowa is looked at as a pro-growth state."

The proposed tax cuts are not just at the state level. 

Two dozen Washington state cities and counties have prohibited local income taxes.

Some critics are pointing to the widespread tax cuts as proof that D.C. gave too much money in COVID-19 relief to states.

"This is the inevitable consequence of sending state and local governments money they didn't need," Committee for a Responsible Federal Budget senior policy director Marc Goldwein told Politico.

"States literally have more money than they know what to do with," he said.

The White House celebrates the tax cuts as proof of the American Rescue Plan's success.

"This plan was designed to both ensure an initial jump start to the economy and that state and local governments had the firepower to overcome predictable and unpredictable bumps in the road," Gene Sperling, a top Biden adviser, told Politico. "The American Rescue Plan succeeded in sparking more growth, more jobs, less unemployment and more revenue."

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