States can offer a lesson as GOP proposes deep cut taxes
LITTLE ROCK, Ark. — President-elect Donald Trump and congressional Republicans who have pledged to cut federal taxes to boost the economy might consider lessons learned in GOP-controlled states that adopted similar strategies, only to see growth falter and budget gaps widen.
The situation is worrisome enough in Kansas, Oklahoma, and Indiana that lawmakers are now debating whether to reverse course and raise state taxes.
And political leaders in states that have seen expanded Republican control, such as Arkansas and Iowa, are signaling caution about any new tax-cut proposals.
‘‘It does not take a PhD in economics to know that we can’t say yes to every spending need, and we should also not say yes to every tax-cut idea,’’ Arkansas Governor Asa Hutchinson warned late last year.
The results show that tax changes always carry an element of uncertainty — about the economy, government needs, and even the prices of commodities such as oil. Although the federal and state tax systems are significantly different, both are subject to forces beyond lawmakers’ control.
A recent Associated Press survey found that more than half of the states — 33 — are currently dealing with a budget shortfall or expect to confront one in the coming fiscal year. Experts say state economic growth has been slower than expected, with revenue in some places failing to meet projections or keep up with rising spending needs.
Hutchinson, who took office vowing to slash income taxes, has proposed a much more modest cut of $50 million annually for low-income taxpayers.
Meanwhile, a top Arkansas GOP lawmaker has said any tax-cut ideas may have to be set aside for a few years until the state’s financial picture improves. State revenue is running $8.8 million behind projections for the fiscal year.
After Indiana Republicans cut income, corporate, and property taxes, the state developed a $300 million budget gap. GOP lawmakers are now pushing a plan to raise gasoline taxes and adopt a new registration fee for motorists to help pay for road improvements. Critics say the effort is simply shifting the tax burden from the wealthy to everyone else.
‘‘This is going to be the first session I remember coming into that the Republicans are advocating for tax increases,’’ said Senate minority leader Tim Lanane, a Democrat. ‘‘At the same time, we’re continuing to give tax breaks to corporations and businesses. How are they going to explain that?’’
In Kansas, lawmakers have struggled to balance the budget since they slashed personal income taxes in 2012 and 2013 at the urging of Republican Governor Sam Brownback. The state has faced economic pressures related to a decline in agriculture and oil prices, but the broad-based tax cuts are viewed largely as an unsuccessful effort to stimulate the economy.
Lawmakers are now debating their third tax increase since the cuts were passed, with the state facing projected shortfalls of $1.1 billion through June 2019. The Brownback administration has proposed higher taxes on certain business owners, cigarettes, beer, and liquor.
Other plans include diverting highway money to general government programs, scaling back contributions to the pension program for public employees and liquidating a $317 million investment fund.
Whatever happens in Washington is likely to affect state budgets in some way. That gives lawmakers another reason to move cautiously.
A federal tax overhaul could eliminate key exemptions benefiting state and local governments. At the same time, the promise by Trump and congressional Republicans to repeal the Affordable Care Act would probably reduce the amount of federal money sent to states.
A House tax plan would reduce federal revenue by $3 trillion in the first 10 years, while Trump’s plan would cut revenue by $9.5 trillion over the same period, the nonpartisan Tax Policy Center said. Trump has disputed the analysis.
Medicaid costs are contributing to budget gaps in Massachusetts, Maryland, Mississippi, New York, and Rhode Island.
In Massachusetts, Governor Charlie Baker projected a nearly $300 million shortfall in the state’s current $39 billion budget, prompting the state to give buyouts to about 900 state workers and trim agency spending by $100 million.
The Massachusetts Taxpayers Foundation projects the state faces an $800 million structural deficit for the fiscal year starting July 1. Key issues include lower tax collections and an unexpected surge in Medicaid enrollment.