ANNAPOLIS, Md. — Soaring tax revenue and billions in pandemic aid from the federal government have left many states with an unusual problem — too much money.
The result is one of the most broad-based movements in recent memory toward giving consumers and taxpayers a break. In red states and blue, lawmakers and governors are proposing to cut taxes and fees, create tax credits, or delay tax and fee hikes that had been planned before the COVID-19 pandemic struck.
Even high-tax states controlled by Democrats, from California to New Jersey, are dangling the possibility. Among those are Washington, where one Democratic senator has proposed cutting the state sales tax from 6.5 percent to 5.5 percent.
“We need to get money back in people’s pockets if we’re to make a full recovery from the high public health cost and economic cost of this pandemic,” said state Sen. Mona Das, the Democrat who proposed the measure. Legislative leaders in her party are cool to the idea of using temporary revenue to finance permanent cuts, but some have rallied behind a one-time sales tax holiday proposal.
States coffers are overflowing after nearly two years of Congress pumping out trillions to help the U.S. economy stay afloat through the pandemic, including sending billions to state governments. Most are enacting or considering tax cuts even while considering big boosts on public schools and infrastructure.
Income and sales taxes are on the chopping block as are vehicle license fees, gas taxes and more.
In Maryland, Republican Gov. Larry Hogan has long pushed for a gradual elimination of income taxes for retirees, something he says will reduce the migration of people leaving the state to lower-tax places such as Florida when they’re finished working. He may finally have a window for striking a deal with the Democrat-controlled legislature.
The state’s projected surplus for the fiscal year that starts July 1 is $4.6 billion in a $58.2 billion budget. That is giving Hogan leeway for a renewed effort to sell his plan. As part of the deal, he’s also calling for making permanent an enhanced income tax credit favored by Democrats for lower-income workers that was put into place last year as a temporary measure.
“We now can afford to do this,” Hogan told reporters at the start of this year’s legislative session.
The idea is appealing to retirees such as Karen Morgan, a lawyer who worked for the state legislature and lives in a Maryland suburb outside Washington, D.C.
“It would be nice to not have to spend some of these limited resources on taxes, and that means that there is extra money to spend on health care,” said Morgan, 65. “There’s extra money to spend on just managing my life. You know, it doesn’t get any easier the older you get.”
For Maryland and other state governments, the fiscal fallout from the pandemic has turned out to be the opposite of the calamity they were bracing for in the spring of 2020.
The federal government has allocated states and local governments about $500 billion in general relief, plus more for specific areas such as education. It has offered separate aid to businesses and committed to $1 trillion in infrastructure spending, with much of that money funneled through states.
And most high-earners avoided layoffs during the pandemic and investors have done well — keeping income tax receipts high. Consumers have used that money to buy a lot of goods: home-office furniture, patio heaters, vehicles. That’s sent sales tax revenue, a key source of government income in most states, soaring.
“States have more money than they can realistically and sustainably spend,” said Jared Walczak, vice president of state projects at the Tax Foundation, a Washington-based think tank that advocates for tax policies fostering growth.
Walczak counted 16 states with income tax cuts last year, including a move toward a flat tax in Arizona and a sweeping one in Arkansas that was passed alongside a tax credit for low-income earners. The Urban Institute tallied 29 states that cut taxes or expanded tax credits last year.
Walczak says more than a dozen states are seriously considering income tax reductions this year.
He said states need to consider tax cuts because the pandemic made it clear that many people can move to a more desirable place and keep working remotely. But some plans might go too far — and some tax cuts could end up disproportionately hurting those on lower incomes.
A proposal in Republican-dominated Mississippi to phase out the personal income tax could drag down revenue enough to force cuts in state government spending in future years.
