Tax Cuts, the “New New Thing”, but not for Californians


COVID-19 launched a whole host of trends, from house remodeling to restaurant delivery to working from home.  But who knew that tax relief would become in vogue?  Thanks to revenue windfalls and the prospect of employees working from anywhere, state tax-cuts have been sweeping the nation. The Tax Foundation reports that so far in 2021, 11 states have cut individual or corporate income taxes—or both, with more states poised to follow next year.

California and many other states ended their fiscal years with more money than they could have imagined during the dark days of the pandemic. How states managed to be in good fiscal shape was due to many factors according to the Tax Foundation: states reduced spending and drew from rainy day funds, taxable incomes rose thanks to the federal stimulus, and revenue from sales taxes continued to be robust.

This list of state tax relief measures is enough to make any Californian high tail out of the state:

  • Arizona, Idaho, Iowa, Montana, and Ohio shrunk the number of brackets in their individual income tax
  • Arizona, Idaho, Louisiana, Ohio, and Oklahoma reduced each of their marginal individual income tax rates
  • Of the 10 states that reduced their individual income tax rates, all but Wisconsin included reductions to the top marginal rate
  • Idaho, Nebraska, Oklahoma, New Hampshire, and Louisiana all lowered their corporate tax rate
  • Montana consolidated seven brackets into two, reducing the top rate and adopting a higher standard deduction to relieve low-income residents.

California had other ideas when it came to managing its surplus.  Instead of across-the-board tax cuts, the state’s progressive politicians aimed for the constituents they hoped to impress. $600 of Golden State Stimulus will go to Californians making $75,000 or less.  Back-rent payments along with several months of future rent will go to low-income renters and landlords as well as payments for past-due water and utility bills.

Other beneficiaries include illegal immigrants over age 50 who starting in 2022 will qualify for Medicaid, raises for child caregivers and funding for pre-K teachers (a nod to the unions), and the financing of 200,000 new child-care slots through portable vouchers to pay caregivers.  Then there’s the first-in-the-nation statewide basic income plan that would give direct cash payments to a targeted group of Californians.

But those are just the headliners – Politico reported a “secret” handout of $280 million for the proposed Oakland A’s new stadium.

In PRI’s upcoming book, Saving California, top budget expert Richard Mersereau writes, “There is no way that government – state or federal – can or will provide on an indefinite basis the majority of income support, childcare, healthcare and housing for a significant and growing percentage of California’s population. The only answer is sustained economic growth, providing more after-tax income for working Californians and sufficient tax revenues for essential services.”

That can’t happen if Sacramento’s progressives continue on a legislative cycle that starts with enacting policies that limit economic growth and kill jobs, followed by increasing entitlements so Californians can cope from the fallout, only to start the process all over again. Continue this for a few more years and those Californians who are able will head for tax-cutting states, and those who are left will be beholden to Sacramento.

Rowena Itchon is senior vice president of the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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