The Republican tax overhaul is giving most Americans a break on their federal income taxes. But fallout from the same law means many people could actually see their state income taxes rise.
For some state governments, the prospect of getting more revenue without actively raising taxes is almost too good to be true, but it also forces Republican governors and lawmakers into a corner. Do they stay true to the party’s long-standing tax-cut philosophy or keep the extra money rolling in to address their states’ budget gaps and other spending priorities?
The answer so far in this year’s still-young legislative sessions: It depends.
Pushes to reduce taxes have arisen in Republican-leaning states including Iowa, Michigan, Utah and Georgia, where the GOP governor has proposed cuts after initially insisting the state should wait.
But in Louisiana, where the Democratic governor and Republican-controlled legislature are grappling with a financial morass, there has been no proposal to return to taxpayers the expected revenue increase of $300 million in the budget year that starts July 1.
That’s because the state is expecting a $1 billion shortfall and state legislatures, unlike Congress, are required to have balanced budgets.
“It was a like a gift from God,” Republican state Rep. Tanner Magee said of the extra tax revenue. “If we weren’t in a billion-dollar shortfall, maybe we would have had those discussions. But when the money came in, everybody was like, ‘Wow, the timing could not be better for the state.’”
Workers in the state saw more in their paychecks in January when employers changed federal withholding, but noticed another change in February: Withholding was up a bit to reflect higher state taxes. Lawmakers said they have been getting questions from constituents about that.
“They’re still coming out ahead. They’re still getting a benefit overall,” said Rep. Nancy Landry, a Republican. “I think they realize that. They know that we’re having a budget deficit. Nobody’s asking that the money be returned to them.”
States are still sorting out what the GOP tax overhaul adopted by Congress and signed by President Donald Trump in December will mean for them, and the answers depend largely on how each state’s tax policy is linked to federal law. In some states, the changes could be immediate; in others, they’re likely to take time.
“In most states, if legislators fail to act, there will be an unlegislated tax increase in effect,” said Jared Wolczak, a senior analyst at the conservative Tax Foundation.
One of the big changes under the new tax law is the elimination of personal exemptions. A bigger standard deduction, higher child tax credits and lower tax rate will mean lower federal taxes for most. But the loss of the exemptions in states means more of residents’ income is taxed.
In a handful of states, including Louisiana, the ability to deduct federal taxes paid on state income tax returns is a major factor. Anyone paying less in federal taxes can see their state bill rise.
States’ own estimates of the impact run from around $100 million annually in Idaho and Iowa to $800 million in Minnesota. Oregon expects revenue to be down.
Meg Wiehe, deputy director of the liberal Institute on Taxation and Economic Policy, recommended against states making tax cuts now because the effects of the federal changes remain uncertain and many of them are technically temporary.
Since the GOP tax law took effect, Georgia has raised its forecast for how much new money it could bring the state. Officials now expect that if the state took no action, it would have an additional $5.2 billion over five years — from higher state taxes on Georgia residents.
A driving force there is a state law that requires people who use the standard deduction on federal returns to also use it when they file their state taxes. The higher federal standard deduction means itemizing isn’t advantageous for as many people when they file federal taxes.
Gov. Nathan Deal, a Republican in his final year in office, initially called for waiting until the impact was clearer — and he was out of office — to address the state tax situation. That didn’t sit well with three Republicans running to replace Deal who said any extra revenue should be returned to taxpayers.
“Windfall is a very pleasant word, but we are debating whether to take more in taxes or not,” said one of them, state Sen. Michael Williams. “We can afford to adjust our budget to ensure Georgians are paying less in taxes.”
The pressure worked. This month, Deal changed course and announced a plan that doubles the state standard deduction and cuts rates. A state projection found that with those measures in place, state revenue would be down by about $500 million over five years.
Kansas has had deep budget problems for years, after the income tax cuts championed by former Gov. Sam Brownback, a Republican, failed to provide the economic stimulus he had promised. Last year, lawmakers agreed to raise taxes, and the state’s top court ordered lawmakers to pump more money into public schools.
Mark Desetti, a lobbyist for the state’s largest teachers union, said that’s why the $505 million expected to come to the state over three years because of the federal tax changes is so welcome.
“It seems to me the wise thing to do would be to take advantage of this so that you don’t have to raise taxes to deal with all of those things, or you can raise them less if you find you need to and see where it goes,” he said.
But that might not be the course followed by the Republicans who control the Legislature.
House Taxation Committee Chairman Steven Johnson said he is working on a bill that would allow people to itemize on their state taxes even if they don’t on their federal returns.