With state tax revenues receding from all-time highs, there’s been a great deal of concern about whether states can afford the tax cuts adopted over the past few years. However, a recent analysis suggests that these concerns may be misplaced. The data reveals that tax revenues remain substantially above pre-pandemic totals, even adjusting for high rates of inflation. More notably, tax revenues have risen more in states that cut taxes than those that haven’t.
The 27 states that cut the rate of a major tax (individual income, corporate income, or sales tax) experienced a 9.8 percent tax revenue increase in real terms between calendar years 2019 and 2023, while states that didn’t cut any of these taxes—or, in a few cases, increased them—saw tax revenues grow by 6.2 percent. This means that the tax-cutting states grew revenue faster with lower rates.
However, it’s important not to naively assert that tax cuts paid for themselves. Instead, we should acknowledge that states that have prioritized tax competitiveness have done better than their status quo peers. In the event of a recession, states that have prioritized greater economic competitiveness through tax reform and relief may find themselves in a better position to weather a downturn.
State tax revenues have been on the rise in recent years for a variety of reasons. The Tax Cuts and Jobs Act (TCJA) broadened tax bases (which flowed through to state tax codes) and increased domestic investment. The Wayfair decision expanded states’ ability to tax remote sales at a fortuitous moment. Inflation, unfortunately and unfairly, has increased taxability in real (not just nominal) terms. And, temporarily, federal pandemic relief boosted state tax revenues indirectly, by subsidizing individuals and businesses who then engaged in taxable activity.
With pandemic relief in the rearview mirror and inflation leveling off, it’s no surprise that state tax revenues have receded somewhat from their all-time highs, nor should it be cause for concern. The trajectory remains good, as do the fundamentals, since the broader economic and policy forces at play remain unchanged.
What’s more, the reversion has been smaller in tax-cutting states than their status quo peers. In 2023, tax revenues in tax-cutting states receded 4.9 percent from their all-time highs (remaining 9.8 percent higher than pre-pandemic), while revenues in states that did not cut taxes slid 8.8 percent.
Concern about the 27 states that cut taxes between 2021 and 2023, therefore, seems misplaced. This doesn’t mean, of course, that all tax cuts are prudent, or that states can’t go too far. But pundits shouldn’t worry about tax-cutting Georgia, Idaho, North Carolina, or Utah. They’re doing just fine. If only things were so sunny in tax-hiking California.
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