While states feared the coronavirus pandemic would wreak havoc on their budgets and force them to slash services, it turns out that many are doing far better than they predicted.
So instead of cutting spending in the wake of the pandemic, many states are cutting taxes.
Nine states have passed legislation to reduce individual or corporate income tax rates that is awaiting governors’ signatures or has been enacted, according to Katherine Loughead, senior policy analyst at the right-leaning Tax Foundation. In some, the reductions are retroactive to January 1, but in others, the cuts don’t take effect until next year.
“Most of the states that are doing rate reductions have a big surplus, and that’s what they are using,” Loughead said. “A lot are pursuing policies they had in mind for a while now, but just didn’t have the revenue to do.”
Many states are finding themselves flush. Income taxes held up as many companies and higher-income employees shifted to working remotely and federal funds helped keep struggling Americans and businesses afloat. The booming stock market brought in hefty capital gains taxes. And sales tax collections continued as people shopped online and bought essentials in the stores.
Many of the measures cut taxes across the board but provide bigger benefits for the wealthy.
In Ohio, Republican Gov. Mike DeWine was set to sign a two-year budget bill on Wednesday that reduces income tax rates and boosts the bottom bracket so more low-income earners will be exempted. But it also eliminates the top bracket for those earning more than $221,300.
This means that the state’s wealthiest 5% of taxpayers will receive nearly 60% of the benefits, while the bottom 80% will get only 23%, according to an analysis for Policy Matters Ohio by the left-leaning Institute on Taxation and Economic Policy.
“Without veto action by DeWine, the legislature will send a windfall to the wealthiest Ohioans while draining revenue the state needs to get back on track after the pandemic,” said Zach Schiller, Policy Matters’ research director. “Altogether, the tax cuts and breaks will cost more than $2 billion over the next two years that could be put to much better use.”
Oklahoma Gov. Kevin Stitt, a Republican, last month signed legislation cutting individual income tax rates by 0.25 percentage point. That reduces the top rate from 5% to 4.75%, the sixth lowest among states that levy income taxes, according to the Tax Foundation.
Also, the state’s corporate income tax rate will fall from 6% to 4%, tying it with Missouri’s for the second lowest in the nation, behind North Carolina, among states with corporate income taxes.
Meanwhile, Idaho’s Republican Gov. Brad Little touted in May that state officials had enacted the largest tax cut legislation in state history – providing more than $435 million in relief over two measures.
A tax bill signed in May provides $220 million in one-time income tax rebates to residents – providing a minimum payment of $50 per taxpayer and dependent or about 9% of the tax amount reported on residents’$2 2019 state income tax forms, whichever is higher.
The legislation also includes $163 million in ongoing tax reductions. It trims the number of income tax brackets to five, from seven, and lowers the top individual and corporate tax rates to 6.5%, from 6.925%.
The primary source of funding for the measure comes from the implementation of a provision several years ago that levies sales taxes on out-of-state purchases made online, according to the Idaho Freedom Foundation.
Several states also made changes to their earned income tax credits, which benefit lower-income workers, particularly many essential employees who braved the pandemic.
“A lot of the EITC expansion is a lot of states saying: Hey, we know this one group of workers has b
States are so flush with funds, many are cutting taxes
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