Facilitated by a still-humming U.S. economy and unprecedented largess from the federal purse, one state after another has been getting religion about the wisdom of tax cuts. The collective effect gives companies and CEOs more financially attractive options for siting and expanding facilities.
The cuts are coming in the form of lower business-income tax rates, sales-tax cuts, flat-tax proposals, new tax credits and more, as states report record budget surpluses. Most significantly, actions are afloat in some blue, traditionally high-tax states as well as historically low taxers, and many in between. Sixteen states implemented tax cuts in 2021, and at least 15 have been seriously considering them this year.
“We are absolutely in a unique period for tax changes,” says Katherine Loughead, senior policy analyst for the Tax Foundation, which studies state tax policies. “Normally in any given year, you’d see a handful of states enact tax changes, but this year if your state isn’t considering tax changes, it’s in the minority.”
Iowa, for instance, cut its corporate income tax rate to 9.8 percent from 12 percent as part of a larger reform package. Georgia adopted a flat tax. Arkansas slashed individual and corporate rates. Louisiana set itself on a path to eliminate its income tax by 2034. Even New York’s governor is calling for tax cuts, including a property-tax rebate.
More states than ever find themselves in a position to afford tax cuts, in part because the onset of Covid created only a V-shaped drop-off in revenues, from which most quickly recovered. Remote work, unhindered spending by luxury consumers and a flood of federal Covid aid have meant even states that projected surpluses recently now have bigger surpluses. The only thing holding back more tax-slashing is that much federal Covid aid prohibits states from using it to cut taxes.
In some ways, other attributes are rising in importance compared with taxes. “States should be doing more of what Virginia did in its bid for Amazon [HQ2] with technical training institutes and big boosts to education infrastructure,” says Brookings Institution’s John Austin.
And CEOs must be wary of some of the new baubles. High-tax states are responding “largely as a defensive move now because of companies and wealthy individuals leaving them,” says economic development consultant Larry Gigerich. “But you can’t cut taxes to prosperity. States need to be competitive in terms of operating costs, too.”
Indeed, some of the most taxing states haven’t been able to stem their predilection even now. New Jersey raised taxes on those earning more than $1 million, for example. Illinois is likely to revert to fiscal muscle memory even after voters rejected attempts to raise taxes on the rich, and even as Governor J.B. Pritzker is proposing a menu of tax cuts, including temporarily suspending sales tax on groceries.
“Businesses have to be more careful in trying to look at what each state is doing and distinguish permanent reforms from temporary relief,” says Loughead.
Concludes Chris Lloyd, president of the Site Selectors Guild, “A few states are trying, but again, it’s the states that always have been perceived as pro-business that are continuing to demonstrate that.”