July 18, 2024<\/b><\/p>\n
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July 18, 2024<\/b><\/p>\n
State lawmakers across the country navigated budget challenges and slowing revenue growth in 2024. This challenge was made worse by the winding down of temporary federal pandemic aid, coinciding with <\/span>deep, permanent tax cuts. The impact of those tax cuts becomes clearer as they weigh on the ability of places like <\/span>Arizona and <\/span>Ohio to fund crucial public services.\u00a0<\/span>\u00a0<\/span> This year brought smaller tax cuts than the past few years as tax-cutting plans were scaled back so lawmakers could balance state budgets. Many permanent income tax rate cuts that passed were measured by roughly a tenth of a percentage point (in Georgia, Idaho, Iowa, Kansas, South Carolina, and Utah). Half of those \u2013Georgia, Iowa, and South Carolina \u2013 sped up cuts already on the books.\u00a0\u00a0<\/span>\u00a0<\/span> Property tax cuts were hotly debated this year, with concerns over housing affordability and property tax affordability front and center. But lawmakers largely failed to deliver effective solutions to these problems. <\/span> This year lawmakers in Illinois and Oklahoma removed groceries from their state sales tax bases. These actions <\/span>continue a trend of states moving to reduce or eliminate taxes on grocery purchases, following state-level elimination in Virginia, a phasedown to elimination in Kansas, and reductions in Alabama, Arkansas, Tennessee, and Utah (pending voter approval) in recent years.\u00a0<\/span>\u00a0<\/span> This year marks the second year in a row that <\/span>Worldwide Combined Reporting, also known as complete reporting, passed a state\u2019s legislative chamber. This makes clear that lawmakers and advocates are becoming more interested in stopping widespread tax avoidance by multinational corporations. <\/span>Minnesota lawmakers led the charge in 2023 and <\/span>Maryland lawmakers grabbed the baton in 2024. In addition to Maryland, the policy was also discussed in states as varied as Hawai\u2019i, New Hampshire, Oregon, Tennessee, and Vermont this year.\u00a0<\/span>\u00a0<\/span> Public investments and family economic well-being are inextricably connected. Over the years, states have chosen to bolster support for low- and middle-income families through refundable tax credits that directly lift after-tax incomes.\u00a0<\/span>\u00a0<\/span> <\/p>\n
\nTough decisions must now be made to make up for lost revenue and fully fund key priorities like education, transportation, and health care. Fortunately, evidence-based tax policies can ensure that wealthy families and corporations pay their share toward the public services that benefit us all.\u00a0<\/span>\u00a0<\/span>
\n\u00a0<\/span>As we reflect on this year\u2019s state legislative sessions, there are a few clear takeaways.<\/span><\/p>\n1. Major tax cuts were largely rejected, but states continue to chip away at income taxes.<\/h2>\n
\nA handful of other states pushed through deeper income tax cuts. Arkansas passed a 0.5 percent top income tax rate cut \u2013 its fourth rate cut in less than two years. Kansas condensed its income tax brackets and lowered rates (cutting their top rate by 0.12 percentage points in the process). And West Virginia <\/span>lawmakers announced the state\u2019s personal income tax cut trigger will reduce each bracket\u2019s rate by 4 percent \u2013 this results in a percentage point reduction ranging from 0.1 to 0.2, with larger rate cuts going to higher tax brackets. Those cuts come as the governor discusses a potential special session to focus on further tax cuts.\u00a0<\/span>\u00a0<\/span>
\nKentucky\u2019s debate, however, is beginning to shift in a different direction as lawmakers have started to <\/span>question the feasibility of a law that would eventually eliminate the state\u2019s individual income tax. The budget cuts required by such a move would be drastic and deeply unpopular.<\/span>\u00a0<\/span>
\nHawai\u2019i also stands apart for its unusual approach to tax cutting this year: it did not cut tax rates, but did reshuffle brackets and increase the state\u2019s standard deduction, setting the state up for a staggering $1.4 billion annual revenue loss by 2031, when the policies are fully phased in.<\/span>\u00a0<\/span>
\nNarrowing the income tax base was also a part of the story this year in Kansas and West Virginia where lawmakers provided full tax exemptions for Social Security income, joining a long list of states that have rushed to provide <\/span>carveouts to high-income seniors in recent years. And four states\u2014Arkansas, Georgia, Idaho, and Utah\u2014reduced corporate income tax rates levied on business profits. The rate reductions ranged from 0.1 to 0.5 percent, with Arkansas passing the deepest cut. By contrast, New Mexico and New Jersey strengthened their corporate taxes by raising rates on business profits.\u00a0<\/span>\u00a0<\/span><\/p>\n2. More states focused on cutting property taxes, but lawmakers are largely missing the point.<\/h2>\n
\nThe property tax cuts that passed in Arkansas, Colorado, Kansas, Georgia, and Wyoming, and that were under consideration in Florida, Nebraska, and <\/span>elsewhere, were disconnected from ability to pay. This is a missed opportunity for lawmakers who have more targeted options at their fingertips: especially property tax <\/span>circuit breakers<\/span> that can keep property tax payments at a manageable share of household budgets for low- and middle-income families.\u00a0<\/span>\u00a0<\/span><\/p>\n3. States continued cutting taxes on groceries.<\/h2>\n
\nIn Oklahoma, groceries were exempted from the state\u2019s 4.5 percent sales tax, which will result in nearly $420 million in annual lost revenue. In Illinois, groceries were already subject to a reduced rate (1 percent instead of 6.25 percent) and lawmakers decided this year to remove the tax entirely.<\/span>\u00a0<\/span>
\nReducing or fully exempting grocery taxes reduces <\/span>the overall regressivity of state and local tax systems. Too often, however, lawmakers pursue grocery tax exemptions without adequate consideration of their cost and whether more targeted options are available for aiding families most impacted by grocery taxes. Refundable tax credits for low-income families such as <\/span>Earned Income Tax Credits (EITCs), <\/span>Child Tax Credits (CTCs), and <\/span>sales tax credits can help food-insecure families as much or more at a lower cost because they do not require giving tax cuts to high-income shoppers and out-of-state visitors.<\/span>\u00a0<\/span><\/p>\n4. More states discussed cracking down on corporate tax avoidance.<\/h2>\n
\nEnacting this policy would be a huge step toward <\/span>eliminating state corporate tax avoidance,<\/span> as it neutralizes a wide array of tax-planning strategies corporations use to pretend their U.S. profits were generated overseas, outside the reach of state tax authorities. And, fortunately for lawmakers, the policy would be a natural extension of features that already exist in state tax law, as more than a dozen states and the District of Columbia currently allow or require companies to file returns that include some profits booked in foreign countries.<\/span>\u00a0<\/span><\/p>\n5. States continued creating and improving effective tax credits for families and children.<\/h2>\n
\nThis year alone, the District of Columbia and Colorado stand out for their moves to do more for children in their communities. D.C. passed a new fully refundable Child Tax Credit that will provide $420 per child under age 6 in low- and moderate-income families. And Colorado lawmakers passed a Family Affordability Tax Credit that, subject to state economic conditions, builds upon their existing refundable Child Tax Credit. The new credit provides a benefit of up to $3,200 in years of strong economic growth for children under 17 in families earning less than $95,000 a year. In New York, lawmakers opted to provide another one-time boost to the state\u2019s Empire State Child Credit.<\/span>\u00a0<\/span>
\nColorado lawmakers also boosted their state Earned Income Tax Credit (EITC) to 50 percent of the federal amount in 2024, 35 percent in 2025, and a baseline of 25 percent in the following years with an option to raise it higher, depending on state economic conditions. Lawmakers in Illinois also provided a child bonus for children under 12 who benefit from the state\u2019s EITC. Those qualifying working families will see a 20 percent increase to the state Earned Income Credit in 2024 and a 40 percent increase in 2025 and beyond.\u00a0<\/span>\u00a0<\/span>
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