GOP tax law leads to a tax hike, more revenue in some states
BATON ROUGE, LA. » The Republican tax overhaul is giving most Americans a break on their federal income taxes. But fallout from the same law means many people could actually see their state income taxes rise.
For some state governments, the prospect of getting more revenue without actively raising taxes is almost too good to be true, but it also forces Republican governors and lawmakers into a corner. Do they stay true to the party’s long-standing tax-cut philosophy or keep the extra money rolling in to address their states’ budget gaps and other spending priorities?
The answer so far in this year’s still-young legislative sessions: It depends.
Pushes to reduce taxes have arisen in Republicanleaning states including Iowa, Michigan, Utah and Georgia, where the GOP governor has proposed cuts after initially insisting the state should wait.
But in Louisiana, where the Democratic governor and Republican-controlled legislature are grappling with a financial morass, there has been no proposal to return to taxpayers the expected revenue increase of $300 million in the budget year that starts July 1.
That’s because the state is expecting a $1 billion shortfall and state legislatures, unlike Congress, are required to have balanced budgets.
“It was a like a gift from God,” Republican state Rep. Tanner Magee said of the extra tax revenue. “If we weren’t in a billion-dollar shortfall, maybe we would have had those discussions. But when the money came in, everybody was like, ‘Wow, the timing could not be better for the state.’”
Workers in the state saw more in their paychecks in January when employers changed federal withholding, but noticed another change in February: Withholding was up a bit to reflect higher state taxes. Lawmakers said they have been getting questions from constituents about that.
“They’re still coming out ahead. They’re still getting a benefit overall,” said Rep. Nancy Landry, a Republican. “I think they realize that. They know that we’re having a budget deficit. Nobody’s asking that the money be returned to them.”
States are still sorting out what the GOP tax overhaul adopted by Congress and signed by President Donald Trump in December will mean for them, and the answers depend largely on how each state’s tax policy is linked to federal law. In some states, the changes could be immediate; in others, they’re likely to take time.
“In most states, if legislators fail to act, there will be an unlegislated tax increase in effect,” said Jared Wolczak, a senior analyst at the conservative Tax Foundation.
One of the big changes under the new tax law is the elimination of personal exemptions. A bigger standard deduction, higher child tax credits and lower tax rate will mean lower federal taxes for most. But the loss of the exemptions in states means more of residents’ income is taxed.
In a handful of states, including Louisiana, the ability to deduct federal taxes paid on state income tax returns is a major factor. Anyone paying less in federal taxes can see their state bill rise.
States’ own estimates of the impact run from around $100 million annually in Idaho and Iowa to $800 million in Minnesota. Oregon expects revenue to be down.
Meg Wiehe, deputy director of the liberal Institute on Taxation and Economic Policy, recommended against states making tax cuts now because the effects of the federal changes remain uncertain and many of them are technically temporary.