State Tax Relief Efforts Not Limited To Red States

Colorado Governor Jared Polis (D), who launched his reelection campaign on February 15, has bucked the leader and the mainstream of his party when it comes to Covid-19 mandates and restrictions. As Governor Polis begins to make the case for a second term, his Democratic counterparts in other governors’ mansions are beginning to break with President Joe Biden on school mask mandates and instead follow Polis’s lead by pivoting to a less intrusive approach. 

Covid-19 mitigation polices and recommendations aren’t the only area where Democratic governors are breaking with President Biden in favor of Governor Polis’s approach. Polis is also sounding a different tune compared to other leading Democratic politicians when it comes to fiscal policy. As has been the case with Polis’s move away mandates to thwart Covid-19, more Democratic governors are pivoting to adopt Polis’s fiscal policy preferences and goals, with an increasing number of Democratic governors proposing and supporting income tax cuts.  

Governor Polis made headlines last summer and drew praise from Republicans when he said that Colorado’s income tax rate “should be zero,” adding that the state “can find another way to generate the revenue that doesn’t discourage productivity and growth.”

Those remarks from Polis came less than a year after a state income tax cut that he endorsed, to the chagrin of leading Democrats in the Colorado House and Senate, was approved by Colorado voters. Since then, three Democratic governors – Roy Cooper in North Carolina, John Bel Edwards in Louisiana, and Tony Evers in Wisconsin — have enacted state income tax cuts. Governor Cooper went so far as to sign a new budget last fall that phases out North Carolina’s corporate income tax entirely. 

Other Democratic governors are now embracing the benefits of reduced corporate income tax rates. Pennsylvania Governor Tom Wolf (D) is calling for a significant reduction in Pennsylvania’s corporate income tax, urging state lawmakers to pass legislation that will phase down Pennsylvania’s corporate income tax from 9.99%, which is currently the second highest corporate tax in the U.S., to 5.99% by 2027. 

Governor Polis is far from the only governor who has announced he would like to zero out his state income tax, but is the only Democrat to express that goal. State income tax phaseout efforts are currently being led by Republicans. West Virginia Governor Jim Justice (R) is working with his state legislature on a plan to phase out their state income tax. Wisconsin Senator Roger Roth (R) recently introduced legislation to cut each of the Badger State’s four income tax rates and use revenue triggers to facilitate further rate reduction in the coming years. Mississippi Governor Tate Reeves (R) is another governor who has previously announced state income tax elimination as a goal. The Mississippi House of Representatives recently did its part to help Governor Reeves accomplish that objective by passing legislation in January to phase out the state income tax with a bipartisan 107 to 4 vote. It is now up to the Mississippi Senate to determine whether legislation achieving Governor Reeves’ goal will be sent to his desk. 

Whereas a bipartisan coalition of legislators in the Mississippi statehouse is working to help Governor Reeves’ accomplish his income tax elimination goal, the free market think tank in Governor Polis’s state, the Independence Institute, has released a plan that would get Colorado to the 0% income tax rate that Polis says is optimal. The Independence Institute is proposing to take the state’s Taxpayer’s Bill of Rights (TABOR) — Colorado’s constitutional tax and spending limit that caps the growth of state spending at the combined rate of population growth plus inflation — and turn it into a mechanism to facilitate the gradual phaseout of the state income tax, which currently stands at 4.55%. 

Colorado taxpayers are issued refunds when state revenue collections surpass the TABOR limit, but the legislature has the discretion to decide how refunds are distributed. The current refund method is a mix between 1) local government property tax exemption reimbursement, 2) a temporary income tax cut, and 3) a sales tax refund. The Independence Institute’s proposal would make the following changes to the way in which TABOR refunds are issued: 

“Through the ballot, voters can (1) require the state to issue all future TABOR refunds through income-tax reductions and (2) make any new income-tax rate created by these reductions permanent,” explains Ben Murrey, director of the Independence Institute’s Center for Fiscal Policy. Murrey points out that “these reforms would put the journey to no income tax on autopilot. Rather than requiring new legislation or ballot measures for each new rate reduction, this would create an automatic trigger for reducing the income tax.”

While Governor Polis has announced his desire to move away from the income tax and supported the income tax cut approved by voters in 2020, Murrey notes that these more recent positions contrast with previous actions taken by Polis. As Murrey recently pointed out, “since the start of his term, Polis has consistently increased taxes and fees rather than cutting them. And he and his party have repeatedly circumvented the state’s constitution to do so.” 

Murrey explains that if Democrats who control the Colorado statehouse want to reduce costs for Coloradans, as they claim is their focus this session, they will “hold the governor to his word,” adding that repeal of Colorado’s income tax “would put an average of about $2,800 per year back into the pocket of every person in the workforce.” No matter what state lawmakers do during the 2022 legislative session, Colorado residents will get the opportunity to vote for another income tax cut this November. Initiative 31, filed by Independence Institute president Jon Caldara and Senator Jerry Sonnenberg (R), would cut Colorado’s flat income tax from 4.55% to 4.40% if approved by voters this November. 

Democratic state legislators in Denver won’t be keen on Murrey’s proposal to turn TABOR into a tool to eliminate Colorado’s income tax, but Polis has proven he is willing to suffer the ire of members of his own party in pursuit of politically popular policies. By supporting previous income tax cuts backed by the Independence Institute, Governor Polis has drawn strong criticism from fellow Democrats, only to see the majority of Colorado voters favor Polis’s position. 

Income tax cuts where approved in 14 states in 2021. Aside from the aforementioned efforts to phase out income taxes in Mississippi, West Virginia, and Wisconsin, additional income tax cutting legislation is pending in other state capitals. Idaho Governor Brad Little (R), for example, signed the largest income tax cut in Idaho history into law on February 4. Days later, on February 11, the Governor of Utah signed into law legislation that cuts the state income tax rate from 4.95% to 4.85%. Those tax cuts approved in Idaho and Utah were the first two state income tax cuts to be enacted in 2022, but they won’t be the last. 

Amid all the uncertainty of life, it’s a safe bet that other state income tax cuts will approved in 2022. Not only that, it’s likely that this next wave of of state income tax relief will be enacted with both Republican and Democratic votes. As Jared Walczak, Vice President of State Projects at the Tax Foundation, recently declared, 2022 “is shaping up to be the year of the bipartisan tax cut.”

Source: Forbes