For the first time in nearly a decade, nearly half the state legislatures are focusing on tax cuts, not tax hikes. Two states—New Jersey and New Mexico—have already reduced personal income taxes and other levies, and 17 others have governor-proposed tax-lowering proposals on their legislative agendas. Only a small number of states, including Alaska, Hawaii, and Vermont, are considering tax increases, according to a survey produced by the Rockefeller Institute’s Center for the Study of the States.
New Jersey’s $285 million tax reduction—in the form of a 5 percent cut in personal income tax rates, an expanded low-income exemption, and an acceleration of a planned cut in the corporate income tax—represents the first stage of Governor Christine Todd Whitman’s campaign proposal to reduce New Jersey’s income tax rates by 30 percent over three years. New Mexico’s $47 million package, also the first increment in a planned stage-by-stage reduction, includes lower income and gasoline taxes.
States typically raise taxes during recessions and trim them back when times get easier, as seems to be happening now. But the tax reductions also reflect growing middle-class frustration with the overall tax burden and fear in many states that businesses will pack up and leave for jurisdictions where the tax load is lighter. Even California, which remains mired in recession, is considering a $135 million tax cut that includes $50 million worth of incentives for businesses to create new jobs.
Most of the proposed tax cuts are relatively small, amounting to less than 1 percent of total revenue. It remains to be seen whether this trend will turn into anything like the late-1970s tax revolt, which cut state taxes by 3.6 percent nationwide.