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States Are Getting A Windfall In Revenues, But Will They Return The Money To Taxpayers?

Tax Cuts: When Republicans were putting together their tax reform plan last year, a chorus of critics warned that it would devastate state budgets. Like so many other claims, this turned out to be false.

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The New York Times reported in November, for example, that “state and local officials in high-tax states like New York, New Jersey and California are warning the tax plan will strain state budgets.”

A “news analysis” in the Washington Post said the tax law would make “it harder for states and cities to pay their bills.”

A widely cited National Education Association report claimed the GOP tax bill would “blow a nearly $250 billion hole in state and local revenue” that would put “nearly 250,000 education jobs at risk.”

But once President Trump signed the tax reform into law, state budget officials started reporting that revenues will actually increase because of it.

New York’s Department of Taxation and Finance, for example, reported in January that it expects tax revenues to go up by $1.1 billion in 2019 because of the tax law. This is a state, mind you, whose governor, Andrew Cuomo, described the tax bill as a “missile of destruction … aimed at New York.”

Michigan figures revenues will be $1.7 billion higher in 2019. Georgia calculates that state revenues will climb by $5.2 billion over five years. Pennsylvania expects a $340 million bump over the next two years.

The Tax Foundation, which has been collecting this data, reports that 18 states so far say they expect at least a modest boost in revenues as result of the Republican tax plan.

The reason for this windfall is that the tax bill expanded the tax base — by limiting or ending deductions — in exchange for lower income tax rates. In states that rely on federal tax law for their own income taxes, this can result in extra revenue if those states keep their income tax rates the same. (States could also get more tax revenue as tax reform boosts economic growth.)

Will States Cut Taxes?

To some extent, then, the tax cuts shifted a bit of the tax burden to the states. Is that a bad thing? Not if the states use the windfall to cut their own tax rates or reform their tax code.

Three states — George, Idaho and Iowa — have already done so. Iowa’s bill, passed this month, will cut taxes by $2 billion over six years. Republicans in Minnesota — which expects to get a $416 million bump in 2019 — are pushing the state to cut tax rates for the first time since 2000. (There’s been no word yet if Gov. Cuomo will return New York’s windfall to its taxpayers.)

“The federal Tax Cuts and Jobs Act gives states an unexpected chance to improve their competitiveness,” noted Jonathan Williams, chief economist at the American Legislative Exchange Council. “That is the untold story of federal tax reform.”

Given the amount of other misinformation peddled by critics of the GOP tax cuts, we’re not surprised that nobody knows about this fact, either.

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