Tax-Cut Promises Meet Reality as State Tax Growth Flags

Bold talk of cutting state income taxes is becoming muted as U.S. governors and legislatures face the reality that they can’t afford to keep their promises, even in an improving economy.

New Jersey Republican Chris Christie’s ambitions to reduce what individuals pay have been sidelined by his administration’s overly optimistic budget projections. Connecticut Democrat Dannel Malloy shelved a rebate plan April 28. And lawmakers in Missouri today overturned a tax cut veto by Democratic Governor Jay Nixon, allowing the reduction to go into effect only after annual revenue growth reaches a certain level, starting in 2017.

Nationwide, state revenue growth in the year’s first three months rose less than 1 percent from a year earlier, according to estimates by the Nelson A. Rockefeller Institute of Government in Albany, New York. That’s the smallest gain since 2010, and it has forced reconsideration -- or abandonment -- of pledges of relief.

“What looked like good news that allowed for some tax cutting has not only stopped, but it has reversed and started becoming bad news,” said Donald Boyd, who tracks state finances at the institute. “It’s hard to cut taxes in a big way when times are still kind of tight and you’ve had several years of serious budget cuts. Tax cuts are coming up against a lot of other priorities.”

Too Soon

State finances have been on the mend for four years, with taxes rebounding from the 18-month recession that ended in June 2009. This year will see 36 races for governor’s offices, many involving chief executives elected in 2010 on promises to cut taxes and shrink government. Ohio Republican John Kasich is among them.

Kasich proposed, and the Republican-controlled legislature last year approved, a 10 percent income-tax cut over three years. The governor in March called for further reductions, paid for by an increase in business and cigarette levies. The idea was met with a cool response from members of his own party. House Speaker William Batchelder said in March that the mix of cuts and increases might not work because revenue to offset the proposed decrease could fall short.

“We’ll be very careful,” Batchelder told Ohio Public Radio. “We’re not questioning what the governor has advanced as a goal, because that’s a good goal, but it may not be doable.”

One Shot

Sluggish revenue in some states was the result of a quirk that isn’t being repeated, Boyd said. In late 2012, as federal tax increases were poised to take effect, investors sold stocks to avoid higher rates, resulting in a one-time boom in state collections.

Last year, several governors pushed for overhauls of their tax codes, though few were signed into law, according to the National Conference of State Legislatures. While 34 states considered such changes, only 14 passed them -- split evenly between cuts and increases. This year, 23 states have considered such plans, with many targeted at particular industries, said Todd Haggerty, who follows tax changes for the Denver-based group.

“Their flexibility to really do a lot of different things is limited,” Haggerty said. “It goes to show how different this recovery has been compared to past downturns.”

Victory Tour

Not all plans have withered. Florida Republican Governor Rick Scott made an election-year push for his “It’s Your Money Tax Cut Agenda.” With the economy rebounding from the real-estate crash, his state forecast a $1.2 billion surplus next year. Last week, the legislature approved the final pieces of his $500 million plan, which included a $400 million rollback in auto-registration fees.

Wisconsin Republican Governor Scott Walker obtained a $500 million cut in March, primarily in property-tax relief.

Still, there’s a note of caution as the debate proceeds. Kansas has enacted two income-tax cuts since Republican Governor Sam Brownback took office in 2011. Brownback’s goal is to eliminate the levy in the belief that it would spur more economic activity.

Moody’s Investors Service downgraded Kansas’s issuer rating to Aa2 from Aa1 on April 30, saying revenue reductions “have not been fully offset by recurring spending cuts.”

The Kansas reductions influenced tax decisions in neighboring Oklahoma, where Republican Mary Fallin signed a reduction May 2, though with the proviso that it take effect only if projected state tax collections in 2016 exceed those of 2014.

In Missouri, both houses of the Republican-controlled legislature overrode Nixon’s veto. The governor nixed the measure May 1, saying the Kansas downgrade supported his view of what he called “an unfair, unaffordable and dangerous scheme.”

Even with the legislative override, the cuts wouldn’t be assured when they’re scheduled to take effect, in 2017. Their enactment would depend on the Missouri treasury collecting at least $150 million above the highest revenue take from the previous three years.