A recent analysis by the independent Tax Foundation finds that the 27 states which cut tax rates on income, corporate, or sales taxes in recent years have experienced greater revenue growth than the states which haven’t cut taxes.
“With state tax revenues receding from all-time highs, there’s been a great deal of handwringing about whether states can afford the tax cuts adopted over the past few years,” writes Jared Walczak, vice president of State Projects at the Tax Foundation, a nonprofit tax policy think tank in Washington, D.C.
“With 27 states reducing the rate of a major tax between 2021 and 2023, is there cause for concern? This question can be addressed empirically, and the data strongly suggest that the answer is no,” Walczak said.
The 27 states that cut the rate of a major tax (individual income, corporate income, or sales tax) experienced a 9.8% tax revenue increase in real terms between calendar years 2019 and 2023, while states that didn’t cut any of these taxes —or, in a few cases, increased them—saw tax revenues grow by 6.2%.
In other words, the tax-cutting states grew revenue faster with lower rates, Walczak said.
“We shouldn’t take this too far, naively asserting that tax cuts paid for themselves,” Walczak said. “But we should also acknowledge that states that have prioritized tax competitiveness have done better than their status quo peers.”
State general fund revenues are up 21% in real terms between FY 2019 and FY 2024. The Tax Foundation analyzed the budget data to see if states are largely applying all increased revenue to spending increases or if they are returning at least some of the revenue gains to taxpayers.
States that have not cut rates of a major tax since 2021 have grown their budgets by 24% percent in real terms, while states that have cut taxes have increased their budgets by 15.1%. In other words, most tax-cutting states have cut taxes out of a portion of revenue growth while still increasing government spending (albeit at a slower clip), not through spending reductions. New Jersey did not cut major tax rates during the 2019-2023 period covered by the Tax Foundation analysis.
Go here to read more about the analysis by the Tax Foundation.
