States tap historic surpluses for tax cuts and refunds

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FILE – Republican Gov. Brad Little, right, announces a special session of the Legislature for a proposed $500 million tax cut and $410 million in education spending to deal with inflation as Republican House Speaker Scott Bedke, center, and Republican Pro-Tem Senate Speaker Chuck Winder, left, look on, Tuesday, Aug. 23, 2022, in Boise, Idaho. State governments, full of cash, return billions of dollars to their residents. Already this year, at least 31 states have adopted some form of tax reduction or refund. (AP Photo/Keith Ridler, File)

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Fueled by the largest surplus in state history, Missouri’s Republican-led legislature devised a $500 million plan to send one-time tax refunds to millions of households. In a shock to some, GOP Governor Mike Parson vetoed it.

Parson’s Objection: He wanted a bigger, longer lasting tax cut.

“Now is the time for the largest income tax cut in our state’s history,” Parson said as he called lawmakers back to a September special session to consider a permanent $700 tax cut. millions of dollars.

Upon its likely approval, Missouri will join at least 31 states that have already passed some type of tax cut or refund this year — a stunning outpouring of billions of tax dollars to the people. Idaho lawmakers are meeting Thursday to consider more tax relief, and Montana lawmakers are also considering a special session for tax relief.

Thanks to federal pandemic assistance and their own rising tax revenues, states have cut personal and corporate income tax rates, expanded tax deductions for families and retirees, cut property taxes, eliminated sales taxes on groceries, and suspended fuel taxes to offset inflation. peak prices. Many also provided immediate tax refunds.

Republicans and Democrats joined the trend of lower taxes in a year of midterm elections.

Yet divisions have emerged over how far to go. While Democrats have generally favored targeted tax breaks and one-time rebates, some Republicans have pushed for permanent income tax rate cuts that could lower tax bills — and state revenues — for years to come. Parson describes it as “real and lasting relief”.

Some budget analysts warn that permanent tax cuts could strain states in a future recession. The US economy has contracted for two consecutive quarters this year, encountering an informal sign of recession.

“Quite simply, relying on the current surplus to fund permanent tax changes is neither fiscally viable nor fiscally responsible, and will ultimately require cuts to state services,” said Amy Blouin, President and CEO of the Missouri Budget Project, a nonprofit organization that analyzes tax policy.

For some states, the current surpluses are unlike anything they have seen before.

Fiscal 2022, which ended June 30 for most states, marked the second straight year of strong tax revenue growth after economic shutdowns triggered declines at the start of the coronavirus pandemic. Many states reported their largest-ever surpluses, according to the National Association of State Budget Officers.

“I don’t think there’s been a time in history when states are better equipped to ride out a potential recession,” said Timothy Vermeer, senior state tax policy analyst at the Tax Foundation, a Washington, DC-based think tank. “Most, if not all, rainy day funds are in a really healthy position.”

According to the Tax Foundation, income tax rate cuts have been enacted in 13 states this year, already equaling last year’s historic total. Republicans control the legislatures in all of those states except New York, where the ruling Democrats have accelerated the timeline for a previously approved tax rate cut.

Republican-led Arkansas was the latest to take action in an August special session. A new law will accelerate the phased reduction in the income tax rate enacted last year and provide a one-time inflation tax credit. Republican Gov. Asa Hutchinson described the $500 million package as “a transfer of wealth from government to taxpayer” that “couldn’t have come at a more important time.”

Nationally, inflation is at its highest level in 40 years, pushing up the prices of most goods and services and squeezing incomes.

At least 15 states have approved one-time rebates on their surpluses, including 10 led by Democratic governors and legislatures, four by Republicans and one — Virginia — with shared partisan control.

Democratic-run California, which posted a record $97 billion surplus, gives rebates of between $200 and $1,050 to people earning less than $250,000 a year and households earning less than $500,000.

The four GOP-controlled states offering refunds — Georgia, Indiana, Idaho and South Carolina — also made permanent tax rate cuts.

Although often popular, tax refunds do little to fight inflation and “may actually be counterproductive” by allowing additional consumer spending on scarce items and thus contributing to the rise prices, said Hernan Moscoso Boedo, an economist at the University of Cincinnati.

Yet large surpluses coupled with inflation make rebates a tempting option for politicians, especially during an election year.

Georgia Gov. Brian Kemp, a Republican facing a re-election challenge from Democrat Stacey Abrams, has been among the most aggressive tax-relievers. He signed a law gradually reducing the income tax rate from 5.75% to 4.99%. He also signed a measure providing for a $1.1 billion tax refund, with up to $250 for individuals and $500 for couples. He proposed an additional $2 billion in income and property tax refunds. And after a law temporarily suspending the state gasoline tax expired in May, Kemp extended gasoline tax relief through mid-September.

“We are trying to help Georgians through this difficult time,” Kemp said.

In Colorado, legislative staff estimate it will cost $2.7 million to implement legislation accelerating an income tax refund of $750 for individuals and $1,500 for couples. The constitutionally mandated surplus revenue refund was originally due to be paid next year, but is now being doled out – with a letter from Democratic Gov. Jared Polis touting it as an inflation relief.

Polis, who is up for re-election in November, had previously criticized the automatic repayment provision. His Republican challenger, Heidi Ganahl, accuses him of “hypocrisy”.

Idaho Governor Brad Little, a Republican, recalled the Legislature for a special session beginning Thursday to consider more tax relief.

He proposes using part of the state’s projected $2 billion budget surplus for a $500 million income tax refund this year. He also wants to cut more than $150 million a year by creating a flat tax rate of 5.8% starting next year. It comes after the state cut the top tax rate in each of the past two years.

“My friends, this is conservative governance in action,” Little said while saying the tax cuts would still leave enough money to boost education funding by hundreds of millions of dollars.

Montana lawmakers are debating whether to call a special session later in September to provide tax relief from a budget surplus. One proposal calls for rebates of $1,000 to homeowners who have paid property taxes in the past two years. It would also offer income tax refunds of $1,250 for individuals and $2,500 for couples.

The majority leaders of the Republican House and the Montana Senate said in a joint statement that the rebates would provide assistance “as soon as possible for expenses such as gas, groceries, school supplies and much more. “. But some lawmakers, including term-limited GOP Rep. Frank Garner, have expressed reluctance.

“My first concern is whether this proposal is driven by an impending emergency or by those who want to write checks to voters because their emergency is only an impending election,” Garner wrote in an op-ed column.

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Associated Press writers Jeff Amy in Atlanta; Jim Anderson and Jesse Bedayn in Denver; Andrew DeMillo in Little Rock, Ark.; Amy Beth Hanson in Helena, Montana; and Keith Ridler in Boise, Idaho, contributed to this report.

This story was originally published August 31, 2022 6:21 a.m.