Explainer: Tax cut trend reaches two-thirds of states

JEFFERSON CITY, Mo. — States brimming with cash are cutting taxes at a rapid pace.

With the enactment Wednesday of an income tax cut in Missouri, about two-thirds of U.S. states have adopted some sort of tax relief in 2022.

For taxpayers, the trend means billions of dollars back in their pockets. Some already have received rebate checks. Others, such as those in Missouri, will realize their tax savings over several years.

One-time rebates — typically totaling several hundred dollars per taxpayer — have been more common in Democratic-led states, though some Republican-led states also have provided refunds.

Many Republican-led states have instead opted for permanent income tax rate reductions, sometimes phased in. In such cases, workers might notice a gradual reduction in the amount of taxes withheld from their paychecks — and potentially get a refund when they file their annual income tax returns.

Here's a look at the tax-cutting trend across the U.S.

Budget surpluses

Economic shutdowns at the onset of the coronavirus pandemic triggered sharp revenue declines for many states in 2020. But those losses turned out to be short-lived. As the economy recovered, state tax revenue came roaring back. At the same time, the federal government provided billions of dollars of pandemic relief funds to taxpayers, which helped boost consumer spending. The federal government also provided billions of dollars of aid directly to states, further bolstering their finances.

The 2022 fiscal year, which ended June 30 for most states, marked the second straight year of large growth in tax collections. Many states reported their largest-ever surpluses, according to the National Association of State Budget Officers. That allowed states to enact tax cuts and rebates, even while increasing spending on government programs and services.

Tax relief trends

At least 33 states have approved some form of tax relief this year.

Income tax rate cuts have passed in 14 states. All have Republican-controlled legislatures except New York, where Democrats who hold power accelerated a previously approved tax rate reduction. At least 15 states have approved one-time rebates from their surpluses, including 10 led by Democratic governors and legislatures, four by Republicans and one — Virginia — with split partisan control.

In addition to general income tax cuts and rebates, some states have approved targeted tax breaks for families or retirees. Others have cut sales taxes on food or suspended gas taxes to help offset the effects of inflation.

Georgia Gov. Brian Kemp signed an order Monday extending the state's gas tax suspension another month, until after the Nov. 8 election. Kemp estimates the state already has forgone about $800 million in gas tax revenue, which benefits roads. He plans to backfill that by using some of the state's $6.6 billion surplus.

Missouri tax cut

While signing the income-tax-cut legislation Wednesday, Gov. Mike Parson said the estimated $760 million reduction, when fully phased in, will be "the largest tax cut in the state's history."

Under previous law, Missouri's top individual income tax rate already was scheduled to fall from 5.3% to 5.2% in January, with the potential to gradually drop to 4.8% if revenue-growth triggers were met in future years. The new law will cut the tax rate to 4.95% in January and exempt the first $1,000 of income from taxation. The tax rate could drop to 4.8% as soon as 2024, if state tax revenue grows by at least $175 million over the high mark of the previous three years.

Missouri's new law also authorizes three additional annual tax cuts that could eventually reduce the tax rate to 4.5%. Each reduction would occur only if state revenue grows by an inflation-adjusted $200 million over the high mark of the previous three years while also exceeding an inflation-adjusted baseline.

Parson said the cuts amount to a 5% reduction in people's taxes. The not-for-profit Missouri Budget Project estimates that a household earning $30,000 annually would save $17 next year, and $29 once the law is fully phased in. For a household earning $152,000 annually, first-year savings would be $348 and eventual savings would reach $759.

Parson also signed a law Wednesday authorizing $40 million of annual agricultural tax breaks benefiting meat processing facilities, urban farmers and biofuel retailers, among others.

Tax cut hesitancy

Some states have bucked the tax-cutting trend. Politically divided government has made agreement difficult among Republicans and Democrats in such states as Minnesota and Wisconsin. But tax relief also has failed in some entirely Republican-led states.

A Republican effort to call a special session of the Montana Legislature to provide tax rebates failed to draw enough support in September.

Oklahoma Gov. Kevin Stitt, a Republican, called the GOP-led state Legislature into a special session in June — and again in September — to consider a sales tax cut for groceries and a reduction in the individual income tax rate. But lawmakers adjourned without passing anything.

West Virginia Gov. Jim Justice, a Republican, also called lawmakers into special session this summer to consider an income tax cut. But the Republican-led Legislature has not passed it. GOP Senate leaders instead have proposed to cut personal property taxes. In November, voters will decide on a constitutional amendment that would allow lawmakers to eliminate property taxes on business equipment and inventory. Justice has spoken against the proposal, saying it could harm schools and counties that rely on property taxes.

Ballot proposals

Despite recent tax rebates, voters in some states will be considering ballot measures this November to increase taxes for certain purposes.

California provided rebates between $200 and $1,050 this year to individuals earning less than $250,000 annually and households earning less than $500,000. A proposition going before voters would impose an additional 1.75% tax on personal income over $2 million, with the proceeds to fund electric vehicle initiatives and wildfire prevention.

Soaring tax collections in Massachusetts have triggered a decades-old law that will return more than $2.9 billion to taxpayers, with refund checks expected to begin in November. That same month, voters will consider a proposed tax increase on incomes over $1 million to benefit education, public transportation and roads.

Colorado accelerated the payment of a constitutionally mandated rebate of $750 per individual and $1,500 for couples this year. The checks arrived before a fall election in which voters will weigh a pair of ballot measures — one cutting the income tax rate from 4.55% to 4.4%, the other increasing taxes on income over $300,000 to benefit school meal programs.

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