Tax cuts are trendy in 2022. Americans accustomed to hearing politicians' complaints about budget shortfalls may be shocked to learn that many states are swimming in cash — and legislators want to share the wealth by slashing taxes on groceries, gas, income and more.
According to an analysis from the nonpartisan public policy research group Pew Trusts, states took in 19% more tax revenue from March to November 2021 compared to the same period in 2019. Yet the pandemic-era increase in state tax collections has been accompanied by record-high inflation, soaring gas prices and a booming real estate market that's made it much more expensive to buy a house or just rent.
Basically: Right now, states are rich, and people are hurting.
To provide some relief — in what just so happens to be an election year in many places — state lawmakers are floating an abundance of proposals that would slash all sorts of taxes.
While lowering tax rates or offering temporary tax holidays are the most popular initiatives, at least a couple states may simply hand out money to taxpayers. In Minnesota, which is sitting on an estimated $9.3 billion budget surplus, Gov. Tim Walz recently proposed payouts of $500 to most single tax filers and $1,000 to married couples. California is looking into $400 rebates for taxpayers, too. No one is officially referring to these payments as new stimulus checks, but that's the gist of what they amount to.
As for the array of state tax cuts, most are still just in the planning stages, and some will surely not become a reality after political battles are fought and votes are counted. But some proposals have already been approved, and locals can look forward to catching a break.
Here are some of the big areas being targeted for tax cuts:
Inflation has driven up the price of cars, meat, Starbucks and more. But arguably the most painful and immediate cost increase Americans are encountering is at the pump. Gas prices reached a record high the week of March 7, and as of Friday the national average remained elevated at $4.27 a gallon — $1.39 more expensive than a year ago.
To offer drivers some help, several states are suspending gas taxes or considering similar proposals. Florida has already approved a one-month pause on 26.5-cent gas tax for October. On Thursday the Georgia Legislature voted to suspend its roughly 30-cent gas tax through the end of May, and Maryland lawmakers are sending a bill on Friday to Gov. Larry Hogan that will drop its 36-cent tax for one month. It also appears likely that a gas tax holiday in Connecticut will go into effect through the end of June.
In California, where gas prices are routinely the highest in the nation due to a range of taxes and requirements, legislators unveiled a proposal that would give $400 rebates to taxpayers. "This proposed $400 rebate would cover the current 51 cents-per-gallon gas tax for one full year, 52 trips to the pump for most vehicles,” lawmakers wrote in a Thursday letter to California Gov. Gavin Newsom. But the money would be paid to anyone who pays income taxes in the state, not just drivers.
At the national level, Congress is considering the Gas Prices Relief Act of 2022, which would drop the federal 18.4-cent fuel tax through the end of the year.
State income tax
Worker wages have been climbing amid high inflation and the "Great Resignation," and the booming stock market has boosted the earnings of many who cashed out of investments recently. This widespread increase in employee income, alongside record-high corporate profits, translates to more tax money collected by states.
Leaders in many of these states say they want to give some of this cash back to curry favor with voters and also hopefully attract new workers and businesses thanks to lower income tax rates.
"We have over-collected taxes to the tune of several billion dollars," Jack Whitver, the Republican Senate majority leader in Iowa, told Des Moines TV station KCCI in January.
A Republican bill that replaces the state's progressive tax system with a flat 3.9% tax rate — and that lowers corporate taxes — was recently signed into law by Gov. Kim Reynolds. “Iowa is now the fourth lowest for individual income tax rates in the nation,” Reynolds said at the signing.
Iowa's new tax structure, to be phased in over four years, has been bashed by Democrats as a giveaway to the rich that hurts funding for schools, job training, health programs and other initiatives.
Similar showdowns over tax reform are taking place all over the country. According to the Tax Foundation, as of Feb. 1, income tax cut legislation was being proposed in 13 states: Colorado, Idaho, Indiana, Michigan, Mississippi, Missouri, Nebraska, New York, Oklahoma, South Carolina, Utah and West Virginia, in addition to Iowa.
New Jersey is often credited with having the highest property taxes in the nation. The average property tax bill in the Garden State is now over $9,000 a year, so any break is welcomed by homeowners. In early March, Gov. Phil Murphy unveiled a new program that would give an average property tax rebate of $700 to homeowners earning up to $250,000 a year. Renters who earn $100,000 or less and are facing higher monthly bills would be eligible for rebates worth up to $250.
In Illinois, Gov. J.B. Pritzker says he wants to take funds given to the state by the federal government and pass them along to homeowners in the form of property tax rebates worth roughly $300 apiece. "I propose immediate property tax relief funded by the state surplus, " Pritzker said earlier this year. "If we double the property tax deduction for Illinois homeowners, we can bring relief to nearly 2 million Illinois taxpayers.”
Finally, a Republican plan in Idaho calls for the total elimination of property taxes on most owner-occupied homes. To offset the lost revenues, the plan — if approved — would increase the sales tax in Idaho from 6% to 7.85%.
Many states host annual tax-free shopping days, when people can buy supplies for school or hurricane season with no local taxes. Now, lawmakers in states like Connecticut, Florida, Georgia and Kansas want to create new tax-free shopping holidays or expand the kinds of purchases eligible for the exemption.
On Wednesday, U.S. Sen. Raphael Warnock, D-Ga., introduced the Relief for Families Act, which would allow cities and states to use federal funding to offset revenues lost during local sales tax holidays. “I hear from Georgians every day that they’re hurting. Basic essentials like groceries, clothing and medicine are more expensive than ever,” Warnock said in a news release.
Other states, such as South Dakota and Kansas, are considering proposals that would lower general sales tax year-round. And still other states are looking into programs that would exempt certain types of goods from sales tax, like diapers, feminine hygiene products and items that are made mostly in America or at least purchased at local stores.
In most states, groceries are already exempt from sales tax. Now, at least eight of the 13 states that still charge some kind of grocery tax are considering dropping or suspending them.
Full elimination of grocery taxes is on the table in Alabama, Kansas, Missouri, Oklahoma, Utah and Virginia, while a proposal in Illinois would drop the 1% tax for one year and a bill in Mississippi calls for a reduction of the grocery tax from 7% to 5%.
Tax cuts in general are popular with voters, and most like the idea of eliminating taxes on groceries, which disproportionally affect lower-income people. "Sales taxes on groceries have an especially harmful impact on income and racial inequities since low-income families tend to spend a larger share of their income on groceries," the Center on Budget and Policy Proposals explains.
The proposals to cut grocery taxes are complicated because some states are also simultaneously trying to cut income taxes, and funding for schools and infrastructure could suffer. Politics will play a big role in whatever decisions are made.
"Republican tax cut supporters typically prioritize income tax rate cuts, and Democratic grocery tax opponents are often hesitant to remove it if that risks budget cuts," Richard C. Auxier, senior policy associate at the Urban Institute & Brookings Institution's Tax Policy Center, wrote recently. "As a result, grocery tax cuts might not make it to the end of the checkout line in many states this year."