U.S. Senate Majority Whip Sen. Dick Durbin (D-IL) speaks as Senate Majority Leader Sen. Chuck … [+]
“Why would you want to raise taxes when you don’t have to?” That’s a question Connecticut Governor Ned Lamont (D) rhetorically posed in response to calls from fellow Democrats for tax hikes on upper income households. While Governor Lamont is rejecting calls to enact what would be Connecticut’s third income tax increase in the past decade, the Nutmeg State governor’s position is a departure from the norm in his party, as his Democratic counterparts in other governors’ mansions are moving to impose state-level tax increases this year to go along with whatever tax hikes President Joe Biden is able to enact.
While prominent blue state governors have released new budget proposals that call for state tax hikes in New York, Illinois, Pennsylvania, and Wisconsin, congressional Democrats are now concerned that Republicans will take red state fiscal policy in the opposite direction by cutting taxes in the places where the GOP controls state government, which is nearly half of the country. Senator Chuck Schumer (D-NY) has gone so far as to include language in the new $1.9 trillion spending package that prevents federal aid from being put toward state tax relief.
A managers amendment to the Senate version of the $1.9 trillion spending package that passed the House on February 27, which sends another $350 billion to state governments on top of the hundreds of billions they’ve already received through previous relief packages, stipulates that states or territories “shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.”
What that means is Senate Majority Leader Schumer and congressional Democrats want to block state legislators and governors from returning the next round of federal aid to states back to taxpayers in the form of tax cuts or rebates. Yet lawmakers in many states across the country have already begun moving forward with various forms of state-level tax relief to enact in 2021 that is not subject to these restrictions included in the $1.9 trillion spending bill.
Governors and legislators in West Virginia and Mississippi are advancing legislation to phase out their state income tax. In New Hampshire, a state where Republicans won back control of the statehouse in 2020, lawmakers have proposed legislation to eliminate the Granite State’s tax on investment income (the state already does not tax wage income).
Tennessee is another no-income-tax state with one of the lowest tax burdens in the country. But as in New Hampshire, lawmakers in Tennessee are still finding ways to provide tax relief. Tennessee Representative Ron Gant (R) has proposed legislation to eliminate the remnants of the Volunteer State’s professional privilege tax, which used to apply to more than 20 professions but now applies to only seven thanks to enactment of a 2019 bill that repealed the levy for most jobs. Legislation to enact income tax cuts and other forms of tax relief have been proposed or will soon be introduced in a number of other states where Republicans control both chambers of the state legislature.
Senate restrictions on the next round of state aid do not affect state tax relief efforts already in the works and others soon to be proposed. But this prohibition will prevent state officials from using any of the $350 billion in additional funds to replenish state unemployment compensation funds, which is among the most pressing needs and, according to the Tax Foundation’s Jared Walczak, “would be one of the most responsible ways states could spend a large, but one-time, infusion that isn’t substantially needed to backfill lost revenues.”
In addition to the restrictions on the use of state aid, the formula by which state aid is divvied out in the $1.9 trillion spending bill is also coming under fire. A bipartisan group of 22 governors issued a joint statement on February 27 urging the Senate to amend the formula. The new spending bill determines the amount of federal aid based on state unemployment rates, which these governors see as rewarding bad behavior and poor, unjustified decisions about restricting commerce.
“Unlike all previous federal funding packages, the new stimulus proposal allocates aid based on a state’s unemployed population rather than its actual population, which punishes states that took a measured approach to the pandemic and entered the crisis with healthy state budgets and strong economies,” notes the joint statement, which was organized by South Carolina Governor Henry McMaster (R) and signed by nearly half of the nation’s governors.
“A state’s ability to keep businesses open and people employed should not be a penalizing factor when distributing funds,” the gubernatorial coalition statement added. “If Congress is going to provide aid to states, it should be on an equitable population basis.”
Senator Lindsay Graham proposed an amendment to the $1.9 trillion spending package that would revert back to the state aid funding formula used in the CARES Act. That amendment was defeated by a 48 to 51 vote in the wee hours of Saturday, March 6, shortly after 2:00 AM.
“The Democratic proposal creates a totally new formula for state and local government, which disproportionately rewards blue states like New York and California,” Senator Graham said. “My amendment retains and keeps in place the CARES formula that was used in the bipartisan package that passed 96-0. It’s a much fairer and better allocation for the country as a whole. Many states benefitted from the CARES formula and it should remain in place.”
In addition to thwarting state-level tax relief and basing the next round of federal aid to states on a contested funding formula, the new federal spending bill also entices states to commit to higher levels of spending in perpetuity. It does so by increasing the federal funding match for states that expand Medicaid in accordance with Obamacare. This promise of more money from Washington is an attempt to get governors and lawmakers in the dozen states that have yet to impose Obamacare’s Medicaid expansion to finally do so. Critics of Obamacare’s Medicaid expansion point out that imposing it will make future state tax relief less likely and future tax hikes a greater possibility, as it adds pressure to the category of state spending that is already growing fastest.
Between its restrictions on state tax relief, a controversial funding formula that many believe rewards bad gubernatorial behavior, and its provision enticing states to permanently grow the size of their governments, it’s not surprising that governors from both parties have spoken out against the $1.9 trillion spending package now working its way to President Biden’s desk. What would be surprising is if enough Democratic senators shared these objections such that it derailed the whole package. That’s not expected to happened but only time will confirm.
I am Vice President of State Affairs at Americans for Tax Reform, a Washington-based advocacy and policy research organization founded in 1985 at the request of President