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MANAGEMENT UPDATE.

CAN STATES AFFORD THE TAX CUTS THEY’VE MADE?

A timely paper from the Volcker Alliance -- “State Tax Cuts After the Pandemic." -- addresses a critical issue of the day: the propensity on the part of some states to see recent year surpluses as a reason to cut taxes.  A few details: 


  • States have embarked on the biggest wave of tax cuts in decades, slashing levies by at least $124 billion on everything from personal income to groceries and gasoline.

  • Thirty-nine states enacted ninety-two substantial tax relief measures in fiscal years 2021–22. 

  • Additional cuts were implemented in 2023, even though revenues had slowed as pandemic-related federal assistance tapered off.



his has been seen as an alarming trend to some, and as the paper’s authors, Can Chen and Alex Hathaway of Georgia State University’s Andrew Young School of Policy Studies, write, “With the impact of the tax relief likely to stretch well into the current decade, states risk budgetary shortfalls and reductions in critical public services if revenues shrink by more than anticipated in future years.”


This isn’t an unlikely turn of events. In fact, as the report points out, the National Association of State Budget Officers (NASBO) reported that total general fund revenue growth slowed to 0.9% in fiscal 2023 following two consecutive years of double-digit increases. NASBO estimated that revenues would fall 1.8% in 2024.


It’s not hard to see the appeal of tax cuts, but their size, and the way they’re implemented, matters. The report presents four strategies that state government “should consider when enacting tax reductions, along with illustrations of strategies that should be emulated or approached with caution due to their inherent risks.”


The four recommended strategies to sustaining fiscal health: 


  • Implementing tax policy changes that are temporary and require reevaluation

  • Incorporating well-designed revenue trigger mechanisms to ensure that tax reductions are fiscally sustainable

  • Prioritizing refundable tax credits to provide targeted and more affordable relief measures for those most impacted by the pandemic

  • Considering medium- and long-term fiscal scenarios to help gauge the risks of policy changes.


For a special recorded briefing about the paper, click here: 


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