According to MultiState Associates, a state and local government relations firm based in Alexandria, Va., here are some of the top tax trends for 2022:
Record Revenues: Nearly every state has taken in record revenue. No state is projecting a budget shortfall for FY 2023. When revenues are tight, interest groups understand budget increases are unlikely. But with states awash in cash, many will expect significant increases for their favorite programs. The only saving grace for state legislative leaders is that 2022 legislative sessions are relatively short in most cases. With mid-term elections coming up, legislators will want to wrap up business as quickly and cleanly as possible.
Income Tax Rate Reductions: With record revenues and an election on the horizon, MultiState reports significant action in states where both the legislature and the governorship are under Republican control. Arkansas again reduced its personal and corporate income tax rates. Although not a Republican trifecta, North Carolina also reduced income tax rates. Income tax rate reductions or eliminations have already been proposed in Indiana, Iowa, Kansas, Mississippi and West Virginia. And, in Florida, the extension of the current lower corporate income tax rate is being considered.
Although “tax swap” proposals to reduce income taxation by expanding sales taxation seem to have fallen out of favor, MultiState noted that we will see such proposals in 2022 as well, based on happenings in Indiana and Kentucky.
The long-term question with all of these proposals is whether rate reductions will be sustainable when the economy and tax revenues inevitably turn down.
Higher Taxes on the “Wealthy:” Despite record revenues, some progressive legislators will continue to advocate for tax increases to fund new programs. Their tax proposals generally target the “wealthy” – high-income or high-net-worth individuals and large corporations.
For example, despite a rosy revenue outlook, legislators in Connecticut last year were disappointed that Governor Ned Lamont proposed and signed a relatively modest budget that didn’t include major revenue increases or appropriations for progressive causes, and signaled that they will try again this year to push progressive priorities.
Similarly, in both Colorado and New York, tax increases were imposed on high-income individuals and businesses even after it was clear new revenue wasn’t needed to balance the budget. While many legislators will shy away from major tax changes in an election year, some progressives will attempt to pass tax hikes on the business community and/or high-income taxpayers and actually campaign on the tax hikes as fulfilled promises.
There are always challenges to enacting new tax packages, but this year in particular features several mitigating factors, according to MultiState Associates. It’s an election year, which means many policymakers will want to avoid changes to the tax code, because “tax reform” in general can be unpopular with voters.
Additionally, the pressure of reelection incentivizes legislators to adjourn session quickly so that they can hit the campaign trail.
Lastly, it may be counterintuitive, but revenue surpluses can actually make it more difficult to budget, because legislators are met with more demands for funding than they could possibly grant. In those cases, it can be tempting for legislators to wrap up the budget as quickly as possible to curtail the seemingly endless funding requests.
