A new report from the Tax Policy Center, a left-wing think tank, said total state revenues rose about 17.6 percent last year. Rainy day state funds — money set aside to cover unexpected expenses — have hit “new record levels,” according to the National Association of State Budget Officers.
Still, those rosy budget balances may not hold up if the economy slows, as expected. The Federal Reserve has begun raising interest rates in an effort to cool economic growth, and there are growing concerns about the potential for another recession. Shares fell before another session Monday, with the S&P 500 falling 3.2 percent as investors worried about a slowdown in global growth, high inflation and other economic concerns.
Cutting taxes too deeply now could leave states on a weaker financial footing.
The Tax Policy Center said its tax revenue forecasts for the remainder of this year and next were “alarmingly weak” as states implement tax cuts and spending plans. Fitch, the rating agency, recently said immediate and permanent tax cuts could be risky in light of changing economic conditions.
“Significant changes in tax policy can negatively impact revenues and create long-term structural fiscal challenges, especially when implemented all at once in an uncertain economic environment,” Fitch said.
The state’s tax cuts are taking place as the Biden administration struggles to respond to rising prices. So far, the White House has resisted calls for a gas tax vacation, although White House press secretary Jen Psaki said in April President Biden was open to the idea. The government has responded by primarily trying to ease supply chain blockages that have caused shortages of goods and counter price inflation, but taming inflation is largely the Fed’s responsibility.
The White House declined to assess the merits of states’ tax cuts, but pointed to government measures to expand fuel supplies and proposals to strengthen supply chains and reduce health care and childcare costs as evidence that Mr. Biden took inflation seriously.
“President Biden is taking aggressive action to cut costs for American families and tackle inflation,” said Emilie Simons, a White House spokeswoman.
