President-elect Donald Trump's proposed tax cuts are prompting a wave of similar initiatives at the state level, even as revenue growth slows. The text discusses the potential impact of both federal and state tax cuts on state budgets and explores various proposals from state governors across the political spectrum.
President-elect Donald Trump has proposed trillions of dollars of tax cuts for individuals and businesses. In some states, governors and lawmakers are seeking to cut millions more. The movement for more tax cuts comes after most states already have slashed income, sales or property taxes in recent years, and it's pressing ahead even though state revenue growth has been slowing or stagnating.
As Congress considers Trump's tax-cutting agenda, state legislatures that are currently getting underway will be weighing whether — or how much — they can afford to reduce their own taxes while still funding core government functions such as schools, prisons, roads and social services. Unlike the federal government, which can run a deficit, states generally must adopt balanced budgets. The Republican-led Congress is considering whether to extend and expand various income tax cuts enacted in 2017 during Trump's first term in office. Some are due to expire this year. The Congressional Budget Office estimates keeping the expiring provisions in place would add about $4 trillion to deficits over a decade. Trump also supports some new cuts, including lowering the corporate income tax rate to 15%. The rate already was reduced from 35% to 21% during his first term. While campaigning last year, Trump proposed to exempt overtime pay, workers' tips and Social Security benefits from federal income taxes. If adopted, those could trigger additional state tax cuts. In 18 states and the District of Columbia, federal income tax changes automatically carry over to state income taxes, unless states specifically reject them. Other states must adopt federal tax changes for them to apply to state income taxes.As they emerged from the coronavirus pandemic, many states accumulated large surpluses thanks to an economic resurgence and influx of federal aid. That fueled a surge in tax cuts that spread to almost every state over the past few years. State revenues have since flattened out, partly because of those tax cuts. State budgets enacted for the current year assume a collective 1.9% increase in general fund revenues, according to the National Association of State Budget Officers. But from July through November — the first five months of the budget year in most states — total state tax revenues declined by 0.6%, according to a new report by the nonprofit Urban Institute. In light of 'weak' revenues, 'states should pause and stop cutting taxes,' said Lucy Dadayan, a principal research associate at the Urban Institute. But others view things differently. Though down from their peak, revenues in most states 'remain strong' and 'well above pre-pandemic levels, even after adjusting for inflation,' said Jared Walczak, vice president of state projects at the nonprofit Tax Foundation. 'Overall, states are experiencing tighter budget conditions,' said Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers. But, he added, 'I think there's still an appetite amongst many legislators and governors that still you ought to provide tax relief.' Kentucky was quick out of the gate as its 2025 legislative session began. The Republican-led state House passed and sent to the Senate a bill that would lower the individual income tax rate by a half-percentage point to 3.5%, effective in 2026. Democratic Gov. Andy Beshear has signaled support for it. If enacted, it would be the state's third tax rate cut since 2023. Elsewhere, new Missouri Gov. Mike Kehoe has talked of phasing out the state income tax. Montana Gov. Greg Gianforte, Georgia Gov. Brian Kemp and South Carolina Gov. Henry McMaster all have proposed additional income tax rate cuts. Utah Gov. Spencer Cox has proposed ending the state's tax on Social Security benefits, while Virginia Gov. Glenn Youngkin has proposed eliminating the state income tax on tips and helping offset a car tax for low- and middle-income earners. All of those governors are Republicans. But Democratic New York Kathy Hochul also has unveiled a sweeping plan that would cut income taxes for most people, expand the state's child tax credit and send New Yorkers up to $500 for what she bills as an 'inflation refund.' In Mississippi, the Republican-led House on Thursday passed and sent to the Senate legislation that would gradually eliminate the income tax, reduce the sales tax on groceries and partially offset that by raising local sales taxes and gas taxes. New income tax cuts recently enacted in Louisiana also are being partially offset by a sales tax hike. Some states are focusing on property tax relief in response to concerns about rising housing costs. North Dakota voters in November defeated a ballot measure that would have ended local property taxes based on assessed value and forced the state to provide billions of dollars of replacement revenue to local governments
TAX CUTS DONALD TRUMP STATE BUDGETS REVENUE GOVERNORS FEDERAL TAXES STATE TAXES
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