State tax cutting trend faces headwinds from declining revenues and tighter budgets
JEFFERSON CITY, Mo. — Income, sales, property and gas taxes: Almost every U.S. state cut at least one such broad-based tax as budget surpluses soared over the past three years.
Some states made permanent tax reductions. Others passed one-time rebates or temporary suspensions. One way or another, whether red or blue, all states save Alaska and Nevada joined in.
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Though even more tax cuts are likely, the trend may be slowing as 2024 legislative sessions begin. That’s because the pandemic-era revenue surge fueled by federal spending and inflation now is receding and, in some states, even reversing into negative numbers.
“Next year will likely be a return to normal for state budgets,” said Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers. “Funds will be more limited. States will have to make decisions on what areas they prioritize.”
California, where financial swings are felt more sharply than most states, has a projected budget deficit of a record $68 billion, an amount exceeding its hefty reserves. Just years after enjoying a record $100 billion surplus, Democratic Gov. Gavin Newsom is now facing a challenging task as he prepares to present the state budget in January.
Though not in the same hole as California, other states also have seen tax revenues decline and spending exceed forecasts. Arizona could face a $400 million shortfall in its 2024 fiscal year. Maryland’s legislative staff recently projected a $761 million budget deficit in 2025, growing to nearly $2.7 billion by 2029 without significant revenue increases or spending reductions.
And Minnesota’s budget office says a projected $2.4 billion surplus for the current two-year budget cycle could flip upside down in the next period, resulting in a $2.3 billion shortfall by the 2026-27 fiscal years.
It’s hard to say how much, if any, of the projected shortfalls are attributable to tax rebates or reductions passed in each particular state. But in general, as tax collections slow, “we’re seeing the impacts of widespread tax cuts being implemented across states,” said Justin Theal, a state fiscal policy officer for the nonprofit Pew Charitable Trusts.
