One report after another in recent months revealed that the nation's richest individuals gained wealth during the pandemic while ordinary families financially stood still or faced impossible decisions—such as between paying rent or putting food on the table. But this fact hasn't stopped certain states from pursuing tax policies that put even more money in high-income households' pockets.
States have repeatedly tried this approach, always with the false promise that sometime tomorrow, the middle class will benefit from today's tax cuts for businesses and the wealthiest people. In the aftermath of the Great Recession, a handful of states cut taxes, claiming that doing so would boost growth and turn their economies around. These cuts led to revenue shortfalls and stifled lawmakers' ability to fund key priorities, such as education, health care and infrastructure.
This time around, the story is different. A confluence of unique events has created state budget surpluses. At the start of the pandemic, states lowered their revenue projections due to a stalled economy. But federal interventions—in the form of aid to state governments, cash payments to households, expanded unemployment insurance and support to businesses—propped up the economy and helped states maintain or even increase their revenue.
Meanwhile, high-income households are financially thriving despite the pandemic. California, one of the wealthiest states in the nation, is projected to have a $46 billion surplus this year. The state is one of the few currently exploring ways to use the added resources to help low- to middle-income people by propping up health care, getting cash to parents of young children and temporarily reducing the state gas tax. Likewise, Kentucky governor Andy Beshear has proposed using his state's surplus to fund pre-k, increase salaries for school personnel, invest in agriculture technology and fully fund Medicaid.
But many other states have used, or are proposing to use, their unexpected fortunes to cut taxes in a way that will worsen economic inequality. States mostly focus their tax cuts on individual income taxes. But income tax cuts often result in a shift to forms of revenue-raising (increased sales tax, other consumption taxes or fees) that weigh more heavily on lower-income households to make up for lost revenue.
Arkansas is a prime example. Last November, the state slashed its top marginal tax rate and threw in a $60 non-refundable tax credit for good measure, claiming the measure as a win for low-income Arkansans. But in the end, households in the top income quintile will receive a windfall tax cut (73 percent of the $520 million cut) while the refundable credit provides barely more than $1 a week to low-income households. The plan makes the state's already regressive tax structure worse.
Arkansas is not alone. A number of other states cut taxes in 2021 for their wealthiest residents. North Carolina legislators reduced its already regressive flat individual income tax and approved a gradual elimination of the state's corporate income tax. Ohio's governor approved $1.6 billion in tax cuts, of which $400 million will go primarily to the state's richest households. And Wisconsin cut tax rates for higher-income households while providing no tax cuts for low- and moderate-income taxpayers.
The trend continues this year. Merely a week into its legislative session, Mississippi house members rushed a bill to eliminate individual income taxes through a committee with minimal public input. They shrouded this tax cut in a bill that includes a popular increase in teacher pay and a hodgepodge of other tax changes such as a 1.5 percent sales tax increase. These changes would create a permanent revenue loss of more than $1.5 billion and raise taxes on the state's poorest residents. Meanwhile, Republicans in Kentucky are bucking the Democratic governor's wishes by working to lower the state's flat income tax rate and replace the lost revenue with higher sales taxes—a huge hit to poor and moderate-income households. And Iowa's governor and legislators have introduced a bill that would swap the state's progressive income tax brackets for a 4 percent flat rate.
We are seeing the effects of our economy's structural inequities emerge in real time as the highest-income households accumulate more of the nation's riches. This deep divide is made possible by decades of tax policy that has favored wealth over work at the federal level and, at the state level, has imposed a higher effective tax rate on low-income people than on the rich.
Still, conservative lawmakers at all levels of government have pushed tax cuts as a panacea in good and bad economic times. At the turn of this century, the answer to a temporary federal budget surplus and a roaring economy was two rounds of tax cuts that disproportionately benefited high-income households. Where might we be today if federal lawmakers had instead used those budget surpluses to meaningfully invest in our people and communities? We will never know for sure. But in the face of current state budget surpluses, we can choose a different path. Rather than top-heavy tax cuts for those who continue to amass an even greater share of the economic pie, we can develop a framework for public policies that invest in our communities, our children and our children's children.
Aidan Davis is a senior policy analyst at the Institute on Taxation and Economic Policy, and Neva Butkus is a policy analyst there.
The views expressed in this article are the writers' own.
