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Event Recap
ICYMI: STATES THAT IMPLEMENTED TAX CUTS FOLLOWING FEDERAL PANDEMIC AID NOW FACE “ BALANCING ACT” AS REVENUES WEAKEN
Authors of a New Issue Paper by the Volcker Alliance and Panel of Fiscal and Budget Policy Experts Discuss Whether Tax Cuts Can be Sustained
The Volcker Alliance and the Penn Institute for Urban Research (Penn IUR) on February 29 hosted an online Special Briefing on the latest Alliance issue paper, State Tax Cuts after the Pandemic: Strategies to Sustain Fiscal Health, which analyzes how states embarked on the biggest wave of tax cuts in decades. Since 2020, states have slashed levies by at least $124 billion on everything from personal income to groceries and gasoline following record high revenues and cash reserves driven in large part by federal pandemic aid.
The paper’s co-authors, Can Chen, Associate Professor of the Andrew Young School of Public Policy at Georgia State University, and Alex Hathaway, Senior Research Associate at the Center for State and Local Finance at Georgia State University, joined Geoffrey E. Buswick, Managing Director and Government Sector Leader at S&P Global Ratings-US Public Finance, and Natalie Cohen, Founder and President of National Municipal Research, in a discussion on whether these tax reductions can be sustained as revenues have begun to weaken, despite the strong U.S. economy.
Read excerpts from the Special Briefing below and watch the webinar here.
“Because of unexpected revenue growth and large federal aid, many states had an unexpected revenue surplus. This puts them in a very strong position to cut taxes,” said Can Chen, Associate Professor of the Andrew Young School of Public Policy at Georgia State University. “When governments use one-time budget surpluses for permanent tax cuts, they may face long term budget challenges. This is why we wanted to specifically look at the long term fiscal implications of permanent expansions of tax cuts.”
“States that have opted for permanent tax cuts recently could face depleted safety net funds and less generous aid in the future. Our report proposes four strategies that states can consider going forward when they implement future tax reductions,” said Alex Hathaway, Senior Research Associate at the Center for State and Local Finance at Georgia State University. “That is a balancing act that requires careful attention and adjustment as new information comes in. Overall, states should be careful in their approaches to enacting tax relief measures and do their best to consider long-term sustainability.”
“The state sector is the highest-rated sector within public finance ratings,” said Geoffrey E. Buswick, Managing Director and Government Sector Leader at S&P Global Ratings-US Public Finance. “As the paper highlights, thanks to a stronger than projected growth across many revenue streams the past few years and the ability to build the reserves to all time levels — typically well above policy — most states passed tax cuts and relief in some form.”
“I think the recommendations and the discussion around being cautious and prudent and being careful not to embed permanent tax cuts [are correct],” said Natalie Cohen, Founder and President, National Municipal Research. “You never know when that black swan event is going to hit, whether it's climate change or some major crisis in the world, geopolitical issues can rear their heads and suddenly put a state on its back foot in terms of revenue changes.”
