A year ago, those who believed states could weather the pandemic without significant tax hikes were dismissed as pollyannas. But by mid-2021, we’re in the midst of the biggest wave of individual income tax cuts in more than two decades, fueled by robust sales growth and policymakers’ assessment of the breakthrough impact of the remote work revolution.
Eleven states have lowered income taxes so far in 2021. Ten of them cut personal income taxes, and four of them (plus one more) cut corporate tax rates. At least two other states can join before the end of the year, including North Carolina, where lawmakers are considering not only individual income tax relief, but also a complete waiver of state corporate income tax. This is a trend with a capital T, and how it came about, not just in spite of but because of a global pandemic, is worth understanding.
The state’s tax revenues have been increasing for years. In the decade leading up to the pandemic, the state’s tax revenue rose 24% even after adjusting for inflation. Then the pandemic came and the states braced themselves for the worst, but something funny happened. State tax collections did not collapse; They held. In many states, tax revenues even increased in 2020, and things will look even better in 2021.
Unlike in previous economic crises, the stock market not only stabilized after an initial slump, but grew at a rapid pace, which boosted income tax collection. Excise taxes have developed well. The federal interventions to support the economy largely worked despite their inefficiency. Despite all the turmoil many people have experienced, taxable activity has remained constant – it has even increased. For most states, the massive government aid packages approved under both the Trump and Biden administrations were icing on the cake and not a buffer against falling revenues. And at the moment, most states have a rosy income forecast.
With this in mind, policymakers were asking themselves a question that didn’t seem possible a year earlier: If we have significant surpluses in the midst of a pandemic, and forecasts predict even higher revenues for years to come, can we afford to give some back? of the surplus to the taxpayer?
Or, viewed differently, can we afford not to?
Millions of employees never return to the office, and millions more have more flexibility to temporarily work from home or be assigned to a remote office while still in a position that was previously tied to corporate headquarters. Many people – especially high earners – are discovering that their job will follow them everywhere.
Some states, like New York, focus on making it difficult for workers to leave the state for fear of emigration. But where states like New York only see risks, others see opportunities.
For many workers who have just left their traditional jobs, lower cost of living and lower taxes can mean a significant quality of life benefit. Not all will agree. While people don’t have to be there for work, New York City, San Francisco, and other expensive, high-tax cities have an undeniable appeal. However, not everyone who is there now would choose to stay if their job followed them elsewhere, and that cohort is now the subject of intense state competition.
The taxpayer has a choice. Are they staying in states like New York and California, where politicians wanted tax hikes even if the revenue crisis did not materialize? (California had a surplus of $ 76 billion, but lawmakers are still talking about a bunch of new taxes they could introduce next year. New York was the only state to raise income taxes this year and pass interest rate hikes after it was clear that the revenues were high and not necessary.)
Or are they taking a serious look at states that are laying out the welcome mat for them?
People are interested in far more than just tax rates. They value an overall quality of life that includes good roads, good schools, a reasonable cost of living, amenities that are important to them, and much more. An era of increased government competition is an era in which all of these priorities are taken into account.
While lawmakers in some states have never paid a tax they didn’t like, many of their competitors have proven they can provide high quality services with moderate tax rates. Since taxpayers are more mobile than ever, this is a recipe for success. And that’s why this renewed focus on competitiveness in the tax area, which already comprises 11 countries, will not stop here.
Jared Walczak is vice president of government projects at the Tax Foundation, a nonprofit research organization based in Washington, DC