GOP tax bill brings welcome changes for state finances

The newly released Tax Cuts and Jobs Act preserves many ideas outlined in the original Republican tax reform blueprint, including several crucial elements necessary for ushering in a new era of growth. For the 50 states, these changes of more competitive business taxes and removal of a deduction that encourages fiscal irresponsibility are needed now more than ever. Not only has it been 31 years since the federal tax code has been overhauled, the American economy is only now beginning to grow at rates prior to the Great Recession. This tepid economic environment explains in part why more than 10 states began the current fiscal year without a budget and is also part of the reason why almost every state’s pension plans are woefully underfunded.

Over the last decade, state general fund revenue has grown by more than 24 percent, while the Consumer Price Index has grown by approximately 20 percent and population 8 percent. With this slow revenue growth, it’s no surprise that more than half of all states faced budget deficits in fiscal year 2017. America has experienced a decade of slow growth, and the states desperately need the changes outlined in the Tax Cuts and Jobs Act for their fiscal well-being to improve.

{mosads}The relationship between national economic growth and state finance cannot be understated. Under the permanent features of the Tax Cuts and Jobs Act, states would likely enjoy at least 3 percent annual growth in gross domestic product compared to the current projections of 1.9 percent annual growth. Using constant 2017 dollars, over 30 years growing at 3 percent annually, the economy would produce approximately $13 trillion more in output. This would result in upwards of $1.7 trillion more in state and local tax receipts, enough to pay bills and cover a substantial portion of unfunded liabilities.

The Tax Cuts and Jobs Act would benefit the states by allowing employers to invest more in job creation and higher wages while also letting hardworking taxpayers keep more of their paychecks. Our current corporate tax rate of 35 percent is one of the highest among developed countries and has hobbled state economic growth. The bill would reduce this to rate to a competitive 20 percent and would reduce the top rate paid by small businesses, often characterized as pass throughs, to 25 percent. These changes would encourage companies to expand and help realize stronger economic growth, leading to more vibrant state economies and finances.

Along with stimulating economic growth, House Ways and Means Chairman Kevin Brady’s push for the removal and limitation of the state and local tax deduction would remedy a distortion that’s been around since the federal income tax was first enacted. Taxpayers deducting what they pay for state and local government services when calculating what they pay for federal government services creates several problems, including incentivizing states to raise their taxes, knowing that wealthy taxpayers can write it off on their federal returns.

By removing the ability to deduct income and sales taxes and limiting the property tax deduction to $10,000, high tax states will have to face the burdens that they’ve placed on their residents rather than rely on the subsidizing effects of the federal tax code and their low tax neighbors. Hopefully, the long term effect of removing the state and local tax deduction deduction is that states will begin to reform their own tax codes as well, moving away from high and distortive income taxes to lower, broader-based taxes.

These and other components of the Tax Cuts and Jobs Act are welcome changes, especially from the state finance perspective. By removing distortive carve outs and making our business taxes globally competitive, the American people can enjoy higher wages, increased job opportunities and more stable state government finances.

Erica York is a tax policy analyst at the American Legislative Exchange Council.