Tax Cuts Are Becoming Governors’ Favorite Economic Weapon

“We are starting to see blue states follow the red-state trend of tax reform,” said Jonathan Williams, director of the American Legislative Exchange Council Center for State Fiscal Reform. “Tax reform is a non-partisan issue and is now widely acknowledged as necessary for fostering economic growth.”

That certainly is playing out now, as noted in a recent comprehensive look at the “Tax Cutting Boon Sweeping the States” in The Wall Street Journal, by Stephen Moore, chief economist at the Heritage Foundation.

Maryland Governor Larry Hogan won election last fall by pledging to overturn “as many as possible” of the 19 taxes and fees that were raised by his predecessor, Democrat Martin O’Malley, Moore noted. In Massachusetts, new Republican Governor Charlie Baker plans to eliminate the state tax on business inventory and cut the corporate income tax. And in Illinois, newly elected Republican Governor Bruce Rauner has pledged to erase the income-tax rate hikes of his Democratic predecessor, Pat Quinn.

In Arkansas, Moore said, with Republicans now in charge of both houses of the legislature and the governorship for the first time in more than a century, newly elected Governor Asa Hutchinson will be able to pursue what he called a “very ambitious” tax-reform agenda. In Nebraska, newly elected Governor Pete Ricketts proposed a sweeping statewide property-tax cut, while the state senate is moving forward with a plan to cut the top income-tax rate to 5% from 6.84%. And Arizona’s new governor, Doug Ducey, said that his goal is to eventually eliminate the state’s income tax.

Many governors and legislatures have been tempted by the prospect of patching some of their fiscal holes by imposing higher gasoline taxes while consumers might not feel the pain at the pump so much because global oil prices have been sliding. But even in some red states where that is on the table—including Ohio and South Carolina—governors have proposed offsetting some of a fuel-tax hike with income-tax cuts.

Still, even many of the enthusiastic crop of re-elected and new Republican governors— 31 in all now, joined by even more new legislative houses in GOP hands—must take pause in their tax-cutting zeal to deal with the fact that state-government coffers still are refilling slowly after being ravaged by the Great Recession and have remained strained even over the last few years by a national economic recovery that has been slow in building.

Sales-tax collections, in particular, have been slow to recover as average American households have continued to struggle financially and so have kept their spending reined in as a result. Some states also continue to cope with the unwelcome vestiges of generous corporate-tax breaks that they granted when times were tougher and jobs were scarcer.

Michigan, for instance, faces a $325-million shortfall in the state’s general fund this year from the cashing in of big chunks of the $10 billion in corporate incentives that it granted over the last 20 years. And Louisiana faces budget gaps estimated at more than $1 billion a year for the next five years, which is roughly the amount the state hands out each year in tax exemptions and incentives to business.

There’s also the fact that some governors and legislators, especially in blue states, believe the best way to help their constituents is to raise taxes, at least selectively.

Thus, Minnesota Governor Mark Dayton, a Democrat who was re-elected last fall, last year passed reforms that trimmed several taxes, some on business, which were projected to save Minnesotans a total of $443 million in the current fiscal year and $956 million in the 2015-2016 fiscal year. But those cuts followed $2.1 billion in tax hikes that were enacted during the 2013 legislative session.

Also, in Pennsylvania, newly elected Democratic Governor Tom Wolf wants to institute a 5% severance tax on natural-gas drillers that he says could pump hundreds of millions of dollars into the state’s education system. Of course, the drillers don’t want to have to pay it.

Meanwhile, the Connecticut legislature was moving through committees a bill that would tax sugary soda sales in the state, because State Representative Juan Candelaria believes such a levy will help tackle childhood obesity.

But on the whole, tax-cutting governors have one new factor in their favor that hasn’t been in play for the last seven years: a generally strengthening economy. That could make their timing perfect.