Personal Taxes

Shortsighted Pattern to Minimize State Private Earnings Taxes Highlighted in SOTU Response – ITEP

.ITEP Staff

By Aidan Davis and Jenice R. Robinson

Since last year, multiple states across the country have proposed or are pursuing costly income and other tax cuts that are heavily tilted toward the highest-income households. State advocates have worked to beat back these proposals and sounded the alarm about the long-term consequences of tax cuts, but legislatures (most GOP-led) continue to introduce and approve top-heavy and permanent tax cuts.

This state tax-cut fervor took center stage last night when Gov. Kim Reynolds of Iowa gave the Republican response to President Biden’s SOTU address. Her state hastily pushed through a tax-cut plan just last week, and she touted it in her remarks. “Because we know that money spent on Main Street is better than money spent on bureaucracy, today, I signed legislation that eliminates Iowa’s tax on retirement income and sets our tax rate at 3.9 percent,” she said. “That’s less than half of what it was just four years ago.”

Iowa’s newly signed tax cut phases in a shift from a graduated personal income tax structure to a flat 3.9 percent rate over the next four years. It also eliminates taxes on retirement income beginning in 2023 and reduces the corporate tax rate to a flat 5.5 percent. ITEP analyzed the plan and found that 76 percent of the cut will go to the top 20 percent. And, Gov. Reynolds has clearly indicated she sees this latest cut as a down payment on her promise to eliminate the state’s income tax.

Iowa isn’t alone. ITEP’s State Tax Watch highlights tax trends in all 50 states. Major tax-cut proposals are underground across the country. Mississippi and Kentucky are two states with particularly egregious proposals that aim to eventually eliminate personal income taxes. Idaho and Utah lawmakers, among others, have already enacted tax cuts this year.

The opposing party typically uses the SOTU response to spotlight rising stars and draw distinctions between their party and the incumbent president’s policy priorities. Clearly, the march toward reducing or eliminating personal income taxes in multiple states is a policy goal that Republican leaders see fit to boast about. But it should alarm those of us who care about alleviating income inequality and investing in our communities. As one state after another pursues this regressive policy approach, they ignore critical questions about how to sustain and build health care, education, infrastructure, childcare and other services that create prosperous communities. Iowa’s tax cuts, for example, will cost the state nearly $2 billion a year once fully enacted. The fact that the state is already underinvesting in health care and education is something anti-tax lawmakers conveniently ignored as they rushed through the tax cut.

In February, ITEP wrote about why states’ pursuit of top-heavy tax cuts is short sighted:

In the aftermath of the Great Recession, a handful of states cut taxes, claiming that doing so would boost growth and turn their economies around. These cuts led to revenue shortfalls and established lawmakers’ ability to fund key priorities, such as education, health care and infrastructure. This time around, the story is different. A confluence of unique events has created state budget surpluses. At the start of the pandemic, states lowered their revenue projections due to a stalled economy. But federal interventions—in the form of aid to state governments, cash payments to households, expanded unemployment insurance and support to businesses—propped up the economy and helped states maintain or even increase revenue.

President Biden’s SOTU address rightly started with Russia’s unprovoked military attack on Ukraine, a necessary emphasis on a humanitarian crisis that threatens independence and democratic values. But the remainder of his speech focused on domestic policy. He highlighted the incredibly valuable impact of governmental policies that supported and lifted those struggling during the pandemic and called out how the theory of trickle-down economics has created deficits and widened the gap between those at the top and everyone else. He emphasized the need to pass parts of his agenda that include tax increases for corporations and the rich and investments in childcare, elder care and prescription drugs.

The distinction on tax policy between the SOTU and rebuttal was dramatic. Both recognize that kitchen table issues are what most people care about, but the policy prescriptions are wholly different—as they have been for more than four decades. gov. Reynolds continued a long tradition of framing top-heavy tax cuts as being for everyone even though they will primarily benefit the wealthy. Given that all but five state tax systems already tax their lowest-income residents at a higher rate than the top 1 percent, Iowa and other states tax-cut sprees will worsen economic and racial inequalities and make some state tax codes more regressive. President Biden in contrast promoted the need to meaningfully invest in people and make sure that corporations and those who have benefited immensely from our economy pay more.

Make no mistake. What we are seeing at the state level as highlighted in Gov. Reynolds remarks is part of a broader agenda for our country. Florida Sen. Rick Scott, head of the National Republican Senatorial Committee, last Tuesday released a plan for the GOP should it take control of Congress next year. Despite all that we know about extreme wealth concentration at the top, the agenda proposes to increase taxes for low-, moderate- and middle-income families. Neither the current state tax-cut spree nor the GOP federal tax agenda will create a path in which this country can adequately invest in its people. History has demonstrated this time after time.

Lawmakers continually say that they want to give money back to the people and help working families. That is a noble and attainable goal. We saw it last year when the American Rescue Plan made historic investments in people and dramatically reduced poverty through an expansion of the Child Tax Credit. There are thoughtful, equitable and sustainable ways to use state tax codes to do so as well, rather than cutting rates or eliminating income taxes. The people and communities across the country affected by these policy decisions deserve government that works for them.

Related Articles