States use surpluses to reduce taxes and counteract inflation


Missouri’s Republican-led legislature designed a $500 million plan to provide one-time tax refunds to millions of households in response to the state’s highest ever surplus. Some were surprised when Republican Governor Mike Parson vetoed it.

The issue of Parson was that he desired a larger and more lasting tax cut.

“Now is the time for the largest income tax cut in the history of our state,” Parson stated as he brought lawmakers back for a special session in September to debate a $700 million permanent tax cut.

Upon the plan’s anticipated acceptance, Missouri will join at least 31 states that have already adopted some form of tax cut or rebate this year – a staggering return of billions of dollars in tax revenue to the people. Idaho legislators will meet on Thursday to examine additional tax benefits, while Montana legislators are also considering a special session for tax relief.

To offset inflationary price spikes, states have reduced income tax rates for individuals and businesses, expanded tax deductions for families and retirees, reduced property taxes, waived sales taxes on groceries, and suspended motor fuel taxes, all with the help of federal pandemic aid and their own soaring tax revenue. Many have also offered immediate tax rebates.

During a midterm election year, both Republicans and Democrats have joined the trend of tax cuts.

Thousands of people in Mississippi lack access to potable water at 04:18

Yet disputes have formed on the extent of the expansion. While Democrats have typically preferred targeted tax incentives and one-time rebates, some Republicans have advocated for permanent income tax rate reductions that may reduce tax bills and state revenue for decades. Parson characterizes it as “substantial and lasting comfort.”

Permanent tax cuts could stretch states during a future recession, warn some fiscal analysts. This year, the U.S. economy has contracted for two consecutive quarters, an informal indicator of a recession.

Simply put, depending on the current surplus to pay permanent tax changes is economically irresponsible and would ultimately necessitate cuts to state services, according to Amy Blouin, president and CEO of the Missouri Budget Project, a non-profit organization that evaluates fiscal issues.

The 2022 fiscal year, which concluded June 30 for most states, saw the second straight year of strong growth in tax receipts after economic shutdowns produced decreases early in the coronavirus epidemic. According to the National Association of State Budget Officers, many states recorded their largest-ever surpluses.

Tim Vermeer, senior state tax policy analyst at the Tax Foundation, a right-leaning think tank, stated, “I don’t believe there has ever been a time in history where states were more prepared to weather a potential recession.” The majority, if not all, of the emergency funds are in excellent shape.

Food prices reach the highest rate of inflation in forty years at 4:03

According to the Tax Foundation, thirteen states have enacted income tax rate reductions this year, already matching the record number of states that enacted such reductions in the previous year. In all of these states, Republicans dominate the legislatures, with the exception of New York, where Democrats in power expedited a previously agreed tax rate cut.

Arkansas, backed by Republicans, was the last state to take action during an August special session. A new bill will accelerate last year’s gradual income tax rate reduction and grant a one-time tax credit for inflation. Asa Hutchinson, the Republican governor of Arkansas, referred to the $500 million package as “a wealth transfer from the government to the taxpayer” that “could not have happened at a more crucial time.”

Nationally, inflation is at its highest level in forty years, driving up costs for most goods and services and squeezing earnings, which are not keeping up.

At least fifteen states have granted one-time payouts from their surpluses, including ten states with Democratic governors and legislatures, four states with Republican control, and one state, Virginia, with divided partisan control.

The Democratic-led state of California, which generated a record $97 billion surplus, is issuing rebates of between $200 and $1,050 to people and households earning less than $250,000 and $500,000 annually, respectively.

Georgia, Indiana, Idaho, and South Carolina, the four states under Republican control that offer rebates, have all enacted permanent income tax rate cuts.

Economist from the University of Cincinnati Hernan Moscoso Boedo stated that tax refunds are ineffective at combating inflation and “may actually be counterproductive” because they encourage consumers to spend more on scarce goods, hence contributing to higher prices.

Nonetheless, large surpluses and inflation make refunds an alluring choice for politicians, particularly in election years.

The timing corresponds to the midterm elections.

Brian Kemp, the Republican governor of Georgia who faces re-election opposition from Democrat Stacey Abrams, has been one of the most aggressive tax cutbacks. The measure he signed gradually reduced the state’s income tax rate from 5.75 percent to 4.99 percent. In addition, he approved a bill granting tax rebates of up to $250 for individuals and $500 for couples totaling $1.1 billion. He has proposed an additional $2 billion in tax rebates on income and property. And after a provision delaying the state’s gas tax briefly expired in May, Kemp extended the exemption until mid-September.

Kemp stated, “We’re trying to assist Georgians through this difficult moment.”

03:50 Governor Brian Kemp of Georgia signs a bill revamping the state’s election regulations.

Legislative officials in Colorado estimate that it will cost $2.7 million to expedite income tax refunds of $750 for individuals and $1,500 for couples. The constitutionally compelled return of excess money was initially scheduled to be paid the following year, but is currently being paid out along with a letter from Democratic Governor Jared Polis promoting it as inflation relief.

Polis, who is up for re-election in November, had previously opposed the provision mandating automatic refunds. Heidi Ganahl, his Republican opponent, accuses him of “hypocrisy.”

The Republican governor of Idaho, Brad Little, has convened a special session of the legislature beginning Thursday to explore additional tax incentives.

Lawmakers weigh in

This year, Little proposes using a portion of the state’s expected $2 billion budget surplus to fund a $500 million income tax rebate. In addition, he intends to save more than $150 million yearly by instituting a flat income tax rate of 5.8% beginning the next year. In each of the previous two years, the state has lowered the maximum tax rate.

Little asserted that the tax cuts would still leave enough money to increase school funding by hundreds of millions of dollars, stating, “This is conservative governance in action.”

Legislators in Montana are debating whether to hold a special session in late September to provide tax relief from a budget surplus. A proposal asks for homeowners who have paid property taxes within the past two years to get rebates of $1,000. It would also pay $1,250 in income tax rebates for individuals and $2,500 for couples.

The Republican majority leaders of the Montana House and Senate claimed in a joint statement that the rebates would provide “immediate assistance with expenses such as gasoline, groceries, school supplies, and so much more.” However, several politicians, like term-limited Republican Representative Frank Garner, have expressed hesitation.

Garner commented in an editorial column, “My first question is whether this idea is motivated by an urgent need or by people who want to write checks to voters because their emergency is an upcoming election.”