Throughout the COVID-19 pandemic and recovery, state revenues consistently beat expectations, leading to unprecedented surpluses in many states. But the windfall appears to be over as revenue projections come back to earth.
The end of federal aid to states and overall economic uncertainty, including the possibility of a recession, have states preparing for slower revenue growth in fiscal years 2024 and 2025. For now, however, states remain fiscally strong, with many using surpluses from the last few years to invest in one-time projects, return funds to taxpayers or make deposits into rainy day funds.
Here’s a look at what NCSL anticipates in the year ahead.
NCSL Forecast ’24
This special report from State Legislatures News covers the topics NCSL’s policy experts anticipate will occupy state lawmakers’ time in 2024 legislative sessions. Read the full report here.
Hot Topic: Anticipating Changes in Fiscal Conditions
Legislative fiscal analysts and lawmakers remain cautious about inflation, which was 3.2% in October, far below its peak of 9.1% in June 2022 but above the 2% rate the Federal Reserve says it wants to achieve. The increased cost of capital projects has put pressure on state budgets and the labor market. Like the broader U.S. market, many legislatures and agencies are struggling with workforce shortages.
With overall fiscal conditions strong, however, states are well positioned to weather budget challenges in the near future.
Hot Topic: Lowering Taxes
Historically, states tend to reduce taxes when financial times are good, and 2023 was no different. Relief was the year’s most prominent tax policy trend. States cut personal income and corporate tax rates, expanded the earned income tax credit, reduced property taxes and created sales tax exemptions.
ACTION: Twelve states—Arkansas, Connecticut, Kentucky, Indiana, Michigan, Montana, Nebraska, North Dakota, Ohio, Utah, West Virginia and Wisconsin—reduced income tax rates, with Indiana, Kentucky and Nebraska expediting the phase-in schedule for those cuts. Several states that didn’t cut rates enacted legislation providing income tax rebates to residents. New Hampshire cut the interest and dividends tax and expedited its phaseout to 2025.
Colorado, Massachusetts, Minnesota, New Mexico and Utah expanding or increasing their earned income tax credit and their child and dependent tax credit.
Reductions weren’t limited to personal income taxes; three states cut corporate income tax rates, and nine states enacted property tax relief. At least 20 states created permanent or temporary sales and use tax exemptions for certain products.
Hot Topic: Sorting Out the Tax Implications of Remote Work
The dramatic nationwide increase in remote work raises complex tax issues for employees, employers, policymakers and state and local government agencies. Employers have been caught off guard, and tax agencies have found some issues difficult to administer. What happens, for example, when a remote employee works in a state where the employer had not previously engaged in business?
That question is addressed in the NCSL white paper State and Local Tax Considerations of Remote Work Arrangements along with a variety of novel remote work taxation issues:
- Personal income taxes.
- Employment taxes, including wage withholding and unemployment insurance taxes.
- General business taxes, including business licenses, corporate income taxes, sales/use taxes, business personal property taxes, and other local taxes.
- Non-tax issues, including those related to wage/hour and employment law considerations.