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Written by Carl Davis of the Institute on Taxation and Econ. Policy last week.
The new presidential administration and Congress have indicated that they intend to bring about a dramatic federal retreat in funding for health care, food assistance, education, and other services that will push more of the responsibility for providing these essential services to the states. Meeting these new obligations would be a challenging task for states during normal times, but these are far from normal times.
As explained in this brief, a range of actions under consideration at the federal level would depress state tax collections and leave states with inadequate revenue to meet their current responsibilities, much less the new ones being envisioned for them by President Trump and the current Congress. In particular, state tax revenues are under threat from the economic fallout created by the budding trade war, aggressive immigration actions and rhetoric, and federal employee layoffs and canceled contracts. Moreover, cuts to IRS tax enforcement and proposals to narrow the federal tax base with new income tax carveouts threaten to directly reduce state tax collections independent of any change in the broader economy. In light of these significant risks to state tax revenues, states should prepare to pause or roll back their recent tax cuts and begin planning for tax increases to help them weather the approaching fiscal storm.
The new presidential administration and Congress have indicated that they intend to bring about a dramatic federal retreat in funding for health care, food assistance, education, and other services that will push more of the responsibility for providing these essential services to the states. Meeting these new obligations would be a challenging task for states during normal times, but these are far from normal times.
As explained in this brief, a range of actions under consideration at the federal level would depress state tax collections and leave states with inadequate revenue to meet their current responsibilities, much less the new ones being envisioned for them by President Trump and the current Congress. In particular, state tax revenues are under threat from the economic fallout created by the budding trade war, aggressive immigration actions and rhetoric, and federal employee layoffs and canceled contracts. Moreover, cuts to IRS tax enforcement and proposals to narrow the federal tax base with new income tax carveouts threaten to directly reduce state tax collections independent of any change in the broader economy. In light of these significant risks to state tax revenues, states should prepare to pause or roll back their recent tax cuts and begin planning for tax increases to help them weather the approaching fiscal storm.