The measures under discussion in more than a dozen states vary widely but the trend cuts across political divides: Governors and state lawmakers are looking for ways to give taxpayers the holiday.
“Building the next New Jersey means building an economic future that uplifts each of us and works for all of us,” Mr. Murphy said. The governor was expected to unveil the tax break Tuesday afternoon during a speech in Trenton.
A year ago, states were swimming in cash from federal pandemic relief programs and levies over estimated sales and capital gains. Reserve funds have collectively risen to historically high levels, according to the National Association of State Budget Officers, or NASBO.
Now, budget officials in New York and California are predicting that revenue growth will slow in the coming months. Fiscal analysts are unsure whether they are outliers or the leading edge of a municipal recession. Tax cuts, he said, should be considered with caution.
The sector outlook for state governments in 2023 is deteriorating but stable, Eric Kim, head of US state ratings for Fitch Ratings, said recently.
“Implementing significant tax policy changes amid an uncertain economic environment raises the risk of unintended consequences,” said Mr. Kim, who counted 17 states that have proposed tax cuts or exemptions this year.
The Northeast has seen a flood of proposals. In New Jersey, Mr. Murphy, a Democrat, also plans to pay the full $7 billion of the state’s underfunded pension liabilities and increase reserves to $10 billion. Massachusetts Gov. Maura Haley, a Democrat, said this week that her upcoming budget proposal would include a reduction in the state’s capital gains tax as well as a new $600 tax credit for dependent children and seniors. In Connecticut, Democratic Governor Ned Lamont recently proposed the first income tax rate cut for that state in nearly 30 years.
The tax-relief efforts varied in size and scope from the Michigan law, which would make pension payments tax-free to the Mississippi government. Tate Reeves’s multi-year push to eliminate his state’s income tax.
“Our state is in the best financial shape in history and our residents deserve a bigger piece of the pie,” Mr. Reeves, a Republican, said in his statewide address, adding that he wants Mississippi to compete with the states. States such as Florida, Tennessee and Texas have no personal income tax.
Mr. Reeves said the increase in the state’s overall personal income has made it possible to cut tax rates. Virginia Gov. Glenn Youngkin, a Republican, proposed using part of the $3.6 billion surplus for an additional $1 billion in tax relief for the second year of the biennial budget adopted in 2022.
And some states and cities are ramping up the search for new jobs by showering companies with big tax breaks. States and local governments including Georgia, Michigan and West Virginia agreed to give at least $1 billion in subsidies eight times in 2022, according to an analysis by Good Jobs First, a nonprofit research group that often criticizes subsidies. Is.
States raise money from a varying mix of sales, income and severance taxes. According to NASB, thirty-three states reported receiving more revenue than projected in their current financial year. Nasbo said the budget proposals for the coming financial year, which begins July 1 in most states, are projecting a marginal increase in collections.
California, whose budget is notably dependent on income taxes imposed on some of its wealthiest residents, broke into an estimated $22.5 billion deficit in Democratic Gov. Gavin Newsom’s January spending proposal after a record $97 billion budget surplus last year. experienced a decline in the budget.
Recent revenue data and analysis from the nonpartisan Legislative Analyst’s Office suggests the shortfall could exceed billions by the time Mr. Newsom presents a revised spending plan in May. The anemic collections are partly explained by the dearth of initial public offerings for tech companies, which can provide a windfall for founders and early investors to tax as income. The LAO said there were 168 in 2022 versus 1,035 in 2021.
In New York, tax collections on which the financial sector relies heavily are expected to peak this quarter, Acting Budget Director Sandra Beatty said earlier this month. The state, where Democratic Gov. Cathy Hochul is not proposing cuts to income taxes, estimates it will end its current fiscal year with an $8.7 billion surplus, but slow growth is projected to increase through 2024-25. There would be a total deficit of $22 billion over the first three years. financial year.
“So we are capitalizing on the gains of the past two years to prepare for the uncertainties ahead,” Ms Beattie said.
Ms. Hochul has proposed higher payroll taxes on downstate businesses to boost mass transit in New York City, and unions and progressive lawmakers in New York have taxed high-income individuals to raise funds to increase spending on social programs. called for an additional levy. Carl Davis, director of research at the Institute on Taxation and Economic Policy, a progressive think tank, said states should be cautious about cutting taxes now.
“I find it disappointing to see the extent to which state lawmakers have adopted a tax-cuts-first mindset. A lot of the issues we’re dealing with now will require more state revenue, not less. , ” he said, without mentioning a specific state.
In Connecticut, Mr. Lamont proposed cutting rates for the state’s lowest tax bracket and expanding credits for low-income filers. Officials estimate the total cost of the changes to the state’s $25 billion budget will be about $500 million a year. Office of Policy and Management Secretary Jeffrey Beckham said targeting the tax cut to middle-income filers helped make it sustainable.
“I want a permanent tax cut that we can support in good times and not in good times,” Mr. Lamont, a Democrat, said while addressing lawmakers. , again tax cuts. Not this time.”
—Christine Mai-Duc contributed to this article.
Write to Jimmy Vielkind at jimmy.vielkind@wsj.com