Amid strong revenue performance and concerns about rising inflation, states have embraced tax relief in recent years. Thirteen states reduced personal or corporate income tax rates in 2021 and another 14 did so in 2022. The tax cuts didn’t stop there; Income tax rebates, gas tax relief, earned income and child tax credits, and retirement income tax reductions, and property tax relief all received a great deal of state attention. In many cases, the tax relief packages have been substantial; reducing revenues by half a billion to over $1 billion annually, once fully phased in.
As a growing number of states wrap up 2023 legislative sessions, it is clear that the tax cutting fervor has not subsided and that relief has been, once again, the most prominent state fiscal trend in 2023.
While the total volume of cuts may not yet rival 2022, at least 13 states have now approved significant tax relief measures that will reduce revenues by hundreds of millions or more. They are summarized below.
Personal and/or corporate income tax rates have been cut in seven states, and three have approved one-time income tax rebate programs. South Dakota cut the state sales tax rate and Tennessee approved a three-month sales tax holiday for food purchases. Many other states have also expanded earned income and/or child tax credits or provided targeted business tax relief.
Several more states are likely to enact significant tax relief measures before the end of the year. Income tax rate cutting legislation is still moving in Arizona, Missouri, Ohio, Nebraska, Oklahoma, and Wisconsin. Minnesota’s House and Senate are weighing competing tax relief proposals. Legislation to reduce the sales tax on groceries has bipartisan support in Alabama. The Texas House of Representatives sent a bill including billions in property tax relief to the Senate.
Fewer states have pursued revenue-raising measures. No broad-based tax increases have been approved in 2023. Even when it comes to excise tax increases, which states often turn to for raising revenue around the margins, only a few bills have made it across the finish line. This is not particularly surprising given strong budget conditions; revenue increases were sparse in 2021 and 2022 as well. However, state tax priorities could change in FY 2024 if there is an economic lull or if states find themselves with tighter budgets than they are expecting. Many states are forecasting continued but weaker tax revenue growth in 2023 and 2024 and will also be grappling with growing spending pressures due to inflation rates and public sector job vacancies.