It’s that time of year again. As new legislative sessions convene in statehouses around the country, lawmakers and governors are out with a raft of new proposals to overhaul their tax codes.

In some of those laboratories of democracy, lawmakers are looking to increase taxes on the wealthiest residents. Others are seeking to make cuts—in some cases dramatic ones.

Many of the initiatives spring from campaign promises that incoming governors made ahead of their election. And many of those governors are enjoying strong budget surpluses at the moment due to conditions created by the easing of the pandemic and the federal response to it.

“Revenue collections have been strong over the last two years, fueled by the economy healing from the pandemic and supported by major federal relief efforts that both strengthened the recovery and directly bolstered state revenues,” says Wesley Tharpe, deputy director of state policy research at the Center on Budget and Policy Priorities. “But revenue growth slowed significantly over the latter half of 2022 due to factors including high gas prices, supply chain shocks caused by geopolitical disruption, and a weak stock market.”

Newly elected Arkansas Gov. Sarah Huckabee Sanders (R), for instance, is proposing to phase out her state’s income tax entirely, one of the issues she campaigned on. Sanders has not set a time frame for enacting her proposal, but has said that she believes the state can afford the tax cuts by modernizing and streamlining its operations.

In North Dakota, Gov. Doug Burgum (R) is proposing to flatten and lower his state’s income-tax rate to 1.5%, a move that he is pitching as a precursor to eliminating income tax entirely. In Wisconsin, Senate Majority Leader Devin LeMahieu has proposed a similar transition to a flat tax, setting the uniform rate of 3.25%.

Lawmakers in Louisiana, Nebraska, and Ohio are also considering flat-tax proposals, according to the Institute for Taxation and Economic Policy, which also notes that Georgia, Idaho, Iowa, and Mississippi took steps to flatten their tax codes last year.

Lawmakers in seven wealthy, solidly blue states are reportedly planning to introduce legislation creating a wealth tax. A wealth tax, unlike an income tax, would collect revenue as a percentage of an individual or family’s total assets. It is seen as a way to combat wealth inequality and is a popular proposal among progressives.

Those states—California, Connecticut, Hawaii, Illinois, Maryland, New York, and Washington—together account for 60% of the nation’s wealth, according to the Tax Foundation, which opposes the proposal and argues it would prompt many wealthy residents simply to move to another state. Some tax experts dismiss “tax-related migration” as largely a myth.

West Virginia lawmakers are considering a proposal to cut state income taxes by 50%. The proposal, backed by Gov. Jim Justice (R), easily cleared the house of delegates this week, and now heads to the Senate.

In Florida, Gov. Ron DeSantis (R) has called for dramatic tax reductions, including a laundry list of proposed tax exemptions and holidays covering items ranging from baby products to medical equipment.

“Florida has accumulated a record budget surplus, and we need to enact a record amount of tax relief, particularly for Florida families who are grappling with inflation,” Gov. Ron DeSantis (R) said in his inaugural address.

Other states are looking at similar exemptions for specific items. In South Dakota, Republican Gov. Kristi Noem is again proposing to eliminate the state’s tax on food, something other states have been considering as well. Arizona Gov. Katie Hobbs (D) wants to exempt diapers and feminine hygiene products from sales taxes. Hobbs is also seeking $50 million to fund a child tax credit for families earning less than $40,000 a year.

She isn’t the only one with this idea. According to the Institute for Taxation and Economic Policy, 10 states last year created or expanded their earned-income tax credits and four adopted or increased their child tax credits.

“This trend looks likely to carry through into 2023, with lawmakers in more than a dozen states already discussing proposals to create new credits and boost existing ones,” the group said. “With the 2023 state legislative sessions just getting started, these early proposals from lawmakers merely scratch the surface of the growing momentum behind these tax credits, and we expect to see more proposals in the coming months.”

Taken together, the various tax proposals seem to skew toward limiting revenue that states will collect. Tharpe at the Center on Budget and Policy Priorities worries that that approach will set states up for trouble if a full-on recession materializes, as many have predicted.

“State revenue collections are facing significant uncertainty that demands caution, even if the direst scenarios don’t materialize,” he says.

“Recessions are especially harmful to states because state leaders, unlike their federal counterparts, must balance their budgets each year, even when revenues are down,” he says. “And unless they offset these revenue drops with targeted tax hikes or by using other fiscal planning tools such as rainy day funds, they must make sizable cuts in essential services.”

This article was originally published in Barron’s on January 19, 2023, and was written by Kenneth Corbin.

1. https://www.barrons.com/advisor/articles/state-tax-proposals-wealth-tax-flat-tax-51674076502
2. Image courtesy of Helistockter/Dreamstime.

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