Between 2021 and 2023 a wave of state tax cuts swept across the nation. 27 states, including Utah, reduced the rate of a major tax. Typically, the income tax has been reduced because everyone knows that is the best way to drive economic growth and grow tax revenues over time. As 2024 now unfolds, there is discussion about how these cuts have worked out and whether or not states can “afford” the tax cuts they have implemented. The data paints a fairly clear picture.
It is interesting to note that there is very little discussion about whether or not states will be able to afford the very steep spending increases that many of them have implemented. Many states robustly increased spending while they were on a sugar high of federal handouts and revenue. If economic growth staggers, there will likely be a day of reckoning for some states (hint: California).
As for states that have cut taxes, Jared Walczak at the Tax Foundation in Washington DC wrote this little gem in March:
“Tax revenues remain substantially above pre-pandemic totals, even adjusting for high rates of inflation. And notably, tax revenues have risen more in states that cut taxes than those that haven’t. The 27 states that cut the rate of a major tax (individual income, corporate income, or sales tax) experienced a 9.8 percent tax revenue increase in real terms between calendar years 2019 and 2023, while states that didn’t cut any of these taxes—or, in a few cases, increased them—saw tax revenues grow by 6.2 percent.
Think about what this means. The tax-cutting states grew revenue faster with lower rates.”1
Jared reminds us all what economics has proven over the time: if you want more of something you should tax it less. Even though history repeatedly teaches us the same lesson, there are always those that bemoan tax cuts as a reduction in the size of the feeding trough that bloated governments feed off of. As this recent data shows, cutting taxes increases revenue to taxing entities and grows the entire feeding trough for everyone.
On a related note, the data shows that states that reduced their tax rates also grew their spending by less in comparison to states that did not reduce their tax rates. Since 2021, states that have not reduced taxes have grown their budgets in real terms by 24%. At the same time, states that have reduced taxes have grown their budgets by 15.1%. Reducing taxes also supplies the needed downward pressure on elected officials’ desire to ramp up spending.
If an economic downturn is on the horizon, the data also shows that tax cutting states will be better off than their peers. Revenues in 2023 provide that illustration as things have begun to flatten out. In 2023, tax revenues in tax-cutting states receded 4.9% from their all-time highs (remaining 9.8% higher than pre-pandemic), while revenues in states that did not cut taxes slid 8.8%.
The Utah Taxpayers Association would like to commend Legislative Leadership and Governor Cox for seeing the wisdom in continually reducing taxes in Utah. Not only is it paying dividends now, further reductions in the coming years will benefit Utah for generations to come.
1. Tax Foundation, March 28, 2024