U.S. states took advantage of “exceptional revenue performance” in 2021 to cut taxes, a step that may lead to “difficult budget choices” in the future, according to an analysis out Tuesday.
The report, from Fitch Ratings, highlights how difficult it may be to roll back tax cuts once they’re implemented, even as the banner tax collections of 2021, as the economy snapped back unevenly from the worst of COVID-19 shutdowns, are not likely not to repeat. States cut taxes more deeply than anticipated, the credit-ratings agency said, leaving some “more vulnerable” as revenue, federal aid and consumer spending return to normal, post-pandemic levels.
The revenue windfall in fiscal 2021 — most states have a July 1–June 30 fiscal year — was thanks to behaviors that shifted during the pandemic. Consumers spent more on goods, which are taxable, than services, which may not be. And more higher-income earners kept their jobs than did lower-wage workers.
According to an analysis from the Tax Policy Center published in August, states collected 19% more revenue in the four months ending in June 2021 than the same period in 2019, before the pandemic hit.
Eighteen states enacted tax reductions of some kind this year, Fitch analysts wrote. Twelve cut income taxes, and six made cuts of varying types, such as tax exemptions for federal stimulus and unemployment payments, or statewide property taxes.
Five states raised or enacted new income or sales taxes for fiscal 2022, but all five — Florida, New York, New Jersey, Washington and Missouri — also implemented new tax rebates.
Fitch also notes that many states made changes to their tax codes that will result in steeper revenue declines than budget writers had originally proposed: “Arizona, Iowa, Idaho, Montana and Ohio reduced tax rates while also eliminating or consolidating entire tax brackets.” Some states cut multiple taxes at once, as well.
Revenue growth wasn’t just strong, the Fitch analysts point out, but also much more robust than policymakers had assumed in the early days of the pandemic. “Multiple rounds of federal stimulus and the lifting of public health restrictions resulted in multi-billion-dollar operating surpluses for many states, boosting available cash and allowing for substantial rainy-day fund deposits,” they write.
“Between January and June, most states revised their fiscal 2021 revenue forecasts upward, with some increasing by double-digit percentage point margins.”