In 2019, only five of America’s 50 governors called for tax increases during their respective state of the state addresses, according to a new analysis from the Center for State Fiscal Reform at the American Legislative Exchange Council. Now in its fifth edition, the annual State of the States report reveals that governors currently have the smallest appetite for tax increases in recent memory.
Even though only five governors called for raising taxes, their proposals to increase tax burdens would represent a critical hit to taxpayers’ pockets. Perhaps the most troubling tax proposal came from Illinois Gov. J.B. Pritzker, who proposed removing Illinois’ last vestige of good tax policy – the flat personal income tax. By moving to a graduated rate structure, Gov. Pritzker would levy a 60% income tax hike on wealthy earners, guaranteed to drive many out of the state. The proposal’s fate is now in the hands of Illinois voters, who will consider it on the 2020 ballot.
New Jersey Gov. Phil Murphy and New York Gov. Andrew Cuomo recommitted themselves to discriminatory income tax brackets for millionaires. These taxes are a massive disincentive for wealthy earners to stay in New York and New Jersey, and many residents have already fled to states with lower taxes. For example, billionaires Carl Icahn and David Tepper left New York and New Jersey, respectively, for no-income-tax Florida. Altogether, New York and New Jersey have lost a net of 1.3 million and 505,000 residents, respectively, to other states since 2007 according to 2019 data from Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index. An extension of the millionaire’s tax could cost New York and New Jersey even more foregone revenue and economic growth over time.
There are a few reasons why such a small number of governors proposed higher taxes this year. First, states simply don’t require more revenue. Tax year 2018 brought in record state revenues because of a booming economy and new Supreme Court opinions that allow states to tax online retail transactions and certain new forms of gambling. Federal tax conformity following the Tax Cuts and Jobs Act also boosted state tax revenues. In many cases, without income tax cuts, states simply conforming to federal base-broadening provisions saw effective tax increases exceeding $200 million annually. States that decided not to cut taxes and opted to pocket this effective tax increase saw significant revenue surpluses versus states that cut taxes and held taxpayers harmless, as documented in the ALEC State Tax Cut Roundup 2018. Even for “progressive” states, raising taxes in the middle of a revenue surplus is bad public policy.
Fortunately, there are some governors taking the lead on good tax policy. Alaska Gov. Mike Dunleavy proposed a constitutional amendment that would forbid the legislature to enact tax increases “without a vote of the people,” and Texas Gov. Greg Abbott vowed to “limit the ability of taxing authorities to raise taxes” by making property tax appraisers more accountable to taxpayers. Record state tax revenues lead most governors to favor returning tax dollars back to taxpayers rather than clamoring for higher taxes.
Every edition of State of the States contains a “best of the best” ranking for the five with the greatest commitment to pro-growth tax and fiscal policies. This year’s “best of the best” list includes Arkansas Gov. Asa Hutchinson, Kentucky Gov. Matt Bevin, Nebraska Gov. Pete Ricketts, Mississippi Gov. Phil Bryant, and South Carolina Gov. Henry McMaster.
Gov. McMaster’s address stands out for its clear roadmap toward an economically competitive South Carolina. On the heels of a landmark tax reform last October, Gov. McMaster pledged to “keep taxes low (and) reduce burdensome regulations.” To keep this pledge, Gov. McMaster recommended a $2.2 billion personal income tax cut for all South Carolina taxpayers. This plan would average out to a 15% overall rate reduction for hardworking South Carolina taxpayers.
While legislatures have the power of the purse, governors have their own control over tax and fiscal policy through budget proposals and budget vetoes. Governors’ addresses provide a window into how state executives will steer their administration and what policies they will pursue when working with legislators. This year’s State of the States report highlights a clear split between many governors who endorse strong, free-market policies designed to grow the economy, versus a few that are committed to high-tax policies that grow government.
Jonathan Williams is the chief economist at the American Legislative Exchange Council. Follow him on twitter @taxeconomist. Skip Estes is a policy coordinator within the Center for State Fiscal Reform. Follow him on twitter @Skip_Estes. Both follow state economic trends and comment regularly on state tax & fiscal policy.
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