State Income Tax Cuts are Handouts to the Rich

With negotiations over President Biden’s Build Back Better agenda completely stalled, there unfortunately haven’t been many developments on the tax front on Capitol Hill these days.

There have, however, been significant developments in tax policy on the state level, and not for the better. Many states have found themselves flush with cash as the economy rebounds from the pandemic; jobs have grown and consumers are spending more, which has boosted revenue from income and sales taxes. In response, Republican state legislators across the country are using their newfound budget surpluses to cut income taxes for residents.

The states doing this are making a huge mistake. For one thing, there is no evidence that cutting income taxes will boost job creation and economic growth, as legislators claim when selling these cuts. But even more importantly, cutting income taxes is bad policy that ultimately amounts to nothing more than a tax break for the wealthy and a tax hike for ordinary workers.

At the outset, everyone gets a tax break (although the largest of those flow to the top), but eventually lower-wage and middle-class workers are left paying more taxes than before. State governments have to be funded somehow, and in the absence of income taxes they almost always rely on increased consumption taxes and cuts in social programs, both of which disproportionately hurt poor and middle-class families while barely touching the wealthy.

While most Republicans in state legislatures are busy promoting the idea of cutting income taxes, there is one notable GOP exception on Capitol Hill doing the opposite: Senator Rick Scott. Instead of promoting a fairer tax system, however, he’s advocating for perhaps an even worse idea than cutting income taxes – raising them for the poorest Americans. Despite significant blowback from both sides of the aisle over this idea, incredibly, Scott has continued to double down on it.

This week, we’re shining a spotlight on these income tax developments.

These states may soon slash their residents’ income taxes by Aimee Picchi
There is a long list of states – the majority of which are governed by Republicans – that have proposed or approved cuts to their state income taxes: Colorado, Georgia, Idaho, Indiana, Iowa, Kentucky, Michigan, Mississippi, Missouri, Nebraska, New York, Oklahoma, South Carolina, and Utah. Legislators are pushing these changes in the name of providing tax relief to middle-class residents, but some state-level analyses have rightly found that most of this “relief” would actually flow to the wealthy. For example, one analysis by the Idaho Center for Fiscal Policy found that the Gem State’s newly passed income tax cuts will reduce taxes by more than $13,000 for the top 1% of earners, but less than $300 for most middle-class households in the state.

House Republicans push through bill focused on revamping Kentucky’s tax system by The Associated Press
In one ongoing push to cut state-level income taxes, Kentucky House Republicans recently voted to eliminate the state’s income tax system entirely. They’re selling it as a move that would create jobs and boost the economy, but they need only look to Kansas to understand that this is doomed to failure. Back in 2012, Kansas Republicans drastically cut their own state income tax with a similar goal of creating jobs and helping businesses. What actually ended up happening was the state experienced lower job growth and business formation. Things got so bad that the entire policy was repealed in 2018, and Kentucky is likely to face the same issues if they follow through with this plan.

Reality Check: Drastic Income Tax Cuts Are Dangerous Despite What Anti-Tax Supporters Say by Brakeyshia Samms
Most states are experiencing budget surpluses as the economy has rebounded faster than anticipated from the pandemic. But state legislators are foolish to use this moment as an opportunity to cut income taxes, because these surpluses are more than likely a temporary phenomenon. When harder economic times return, states will be forced to raise revenue by increasing consumption taxes and cutting social spending, which will disproportionately hurt low-income workers. State legislators would therefore be wise to use their budget surpluses to instead make critical investments in education, infrastructure, health care, and other public services.

Sen. Rick Scott wants every American to pay at least some income taxes by NPR
A few weeks ago, Senator Rick Scott released an 11-point GOP plan in which he proposed: “All Americans should pay some income tax to have skin in the game, even if a small amount. Currently over half of Americans pay no income tax.” In an interview with NPR, Scott doubled down on this assertion. He expressed a belief that Americans who are able-bodied and benefit from government programs but choose not to work should pay income taxes. (This is all too reminiscent of Mitt Romney’s “47%” gaffe and Paul Ryan’s “makers and takers” claim.) Despite evidence suggesting that his proposal would raise taxes for the poorest 40% of Americans by over $1000 per year, incredibly, Scott continued to insist that he “doesn’t want to raise anyone’s taxes.” (Please note: this interview is only accessible via audio.)

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