Democrats in Congress have made it much easier for state-level Republicans to slash taxes this year, just ahead of the midterms.
This legislative season, tax cuts are on the agenda around the country. But especially in Republican-led states. Big budget surpluses have inspired the governors of Missouri, South Carolina and Iowa to propose cuts to their income tax rates. Utah’s Senate recently approved a $160 million tax cut, with its state House of Representatives expected to make the proposal even more expansive. And Mississippi is working to cut taxes on food sales and car tags — and to phase out its income tax entirely. The whole package will cost the state about $1.5 billion.
Historically, recessions are accompanied by massive state budget crunches because job losses cause tax revenue to fall and demand for safety-net services to rise. After the Great Recession, for example, it took years for state tax revenue to recover. So how is it that some states today have enough money to absorb billion-dollar-plus tax cuts?
The answer: partly because of the unusual nature and path of the pandemic recession, and partly because Democratic lawmakers gave states way more aid than they needed last year.
Compared with previous downturns, job losses in the recent pandemic recession were much more concentrated among low-wage workers. This was obviously horrible news for those workers, but it kept state finances more intact. States, particularly those with progressive income tax codes, are much more dependent on tax revenues from high-income residents than low-income ones.
Additionally, big (bipartisan) federal safety-net expansions passed during the Trump administration helped boost state and local tax revenue more indirectly. Generous unemployment benefit expansions and multiple rounds of near-universal stimulus checks gave even jobless households more income, and therefore more available spending money. This helped keep sales tax revenue healthy, too.
By early 2021, it became apparent that most states (with a few major exceptions) managed to avoid the severe fiscal distress that many economists had feared. But after President Biden took office, Democrats decided to go big with their stimulus bill anyway. With their American Rescue Plan, passed last March, Democrats sent states and localities an additional $500 billion, including direct state and local covid relief grants, plus separate funding for education, transit and other programs.
As a result, many states have more cash than they know what to do with. According to the Committee for a Responsible Federal Budget, total state and local receipts were 26 percent higher in 2021 than they were in 2019.
In the year since the Democrats’ stimulus package passed, Republican lawmakers who opposed it have tried to take credit for launching the many new programs supported by the bill — broadband access, public health investments, etc. Now, state-level Republicans are also channeling the money to pay for initiatives that federal Democrats explicitly didn’t want it to support, including tax cuts that disproportionately help the wealthy.
In short: Republicans are taking these deficit-financed federal dollars, passing them on to constituents in the form of lower taxes and reaping the political benefits — all while being able to blame Democrats for the enormous cost they add to the federal debt.
Given the size and design of the Democrats’ stimulus bill, this problem was foreseeable.
Democrats did include legislative language that forbade any pandemic relief funds from being used to “either directly or indirectly” finance tax cuts. But enforcing that provision was always going to be difficult, both because of its questionable constitutionality and because money is fungible. That is, states can shift dollars around and use federal relief funds to pay for things that used to be funded by (newly reduced) state taxes.
Federal judges have already blocked Treasury from enforcing the no-tax-cut provision in at least 15 states, according to Joe Bishop-Henchman, a vice president of the National Taxpayers Union Foundation. More litigation is pending, but these developments have emboldened Republicans, who are eager to use Democrats’ sloppy bill design against them. Florida’s governor has suggested he plans to use federal dollars to directly offset a gas-tax cut to spite Biden.
You might argue that it’s shortsighted for states to use a one-time infusion of federal dollars to, say, permanently cut income taxes, as Mississippi proposes to do — particularly because there’s still a fair amount of economic suffering that federal covid relief dollars could target instead. But Mississippi Sen. Roger Wicker (R) has simultaneously been working on another round of federal covid relief that would handle that need.
So perhaps red states reasonably assume that Democrats won’t learn their lesson — and will keep the federal dollars flowing, even if doing so hands Republicans home-state political victories.