Should we cut our state income tax by 1%?

Posted on April 25, 2022

Our state budget is projected to have a $2 billion surplus for the fiscal year ending June 2022. The surplus primarily results from the large federal grants received last year. The legislature and the administration have more than a few ideas to deal with this situation. Here are the details:

Is this surplus temporary or permanent? The current budget surplus results from a few different factors – first, the performance of stock markets and resultant capital gains. Second, large grants from the Federal government from the American Rescue Plan. Finally, many state programs have been unable to use their allocated funds because of COVID-related curtailments. The current surplus is likely a temporary situation, and we may revert to deficits.

Tax cuts: One idea being discussed is to enact a small tax cut and return some of these dollars back to the taxpayers. After all, we have increased taxes in deficit years; it is only fair that we reduce taxes during surplus years. The administration has proposed an earned child tax credit. That proposal is not an actual tax cut because many recipients of this credit may not pay any taxes. The Republican caucus has proposed an income tax cut of 1%, from 5% to 4%, for all income up to $75,000. Another idea is to reduce the sales tax to make our state more affordable. A small income tax cut for the middle class is my preference.

Reducing our outstanding debt: It is hard to get too excited about a $2 billion surplus when the state shows an overall debt of nearly $100 billion in the last Comprehensive Annual Financial Report (CAFR). This debt consists of $25 billion in actual debt to investors and $75 billion of unfunded liabilities (pensions and other post-employment benefits). Our default option should be to pay down this debt.

Increased allocation to various programs: Many legislators are looking at increased spending such as expanding Husky to new demographics. The state employees have pressed for and received significant wage increases based on this surplus. We need to be cautious about all these proposals lest this talk of surplus ends up in a new deficit.