States’ COVID tax cuts could lead to financial issues

Bonds

A wave of tax cuts that states passed amid COVID-related surpluses may prove a financial problem for the medium and long term, analysts said Thursday.

“The examination of states’ post-pandemic fiscal trajectories reveals a concerning trend: revenue growth has decelerated in many states and the implementation of permanent tax cuts could leave some with depleted cash reserves,” said Volcker Alliance Senior Director for Public Finance William Glasgall. He urged “caution and foresight” in fiscal management to ensure “short-term benefits do not compromise long-term fiscal stability and resilience.”

During fiscal 2021-2022, 39 states enacted 92 substantial tax relief measures. Some passed additional tax cuts in fiscal 2022-2023.

“Revenue growth has decelerated in many states and the implementation of permanent tax cuts could leave some with depleted cash reserves,” said Volcker Alliance Senior Director for Public Finance William Glasgall.

Georgia State University Associate Professor Can Chen and Senior Research Associate Alex Hathaway said, while tax cuts were “politically popular,” they raise “sustainability concerns.” said Chen.

Their recommendations suggest “temporary tax policy changes, with an emphasis on reevaluation and the inclusion of revenue triggers, to avoid the fiscal pitfalls of using one-time funds for permanent cuts.”

States should prioritize refundable tax credits to provide relief for those in need while considering medium- and long-term fiscal scenarios to gauge policy risks, Chen and Hathaway said.

States should be able to handle any disasters or shocks that might affect them in the next two or three years because they have strong rainy-day balances, but many states will be challenged to make needed investments to combat climate change, Chen said.

S&P Global Ratings Managing Director Geoffrey Buswick said some states are still considering enacting tax cuts.

While no states have a negative outlook from S&P, tax cuts may hurt government finances in a possible economic downturn. States will need to take action to avoid real budget imbalances that would affect their ratings, he said.

National Municipal Research President Natalie Cohen said because of climate change, states like Florida are having problems with property insurers leaving, folding, or increasing their premiums, and this will pressure those states.

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