Revenue Surpluses Provide Opportunity for Tax Relief within States

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By Toby Burke

The economic slowdown from the COVID-19 pandemic initially raised concerns within states that general revenue collections would be lower than anticipated and, as a result, create shortfalls in maintaining a balanced budget. Although revenue collections from specific sectors of the economy, such as hospitality and tourism, were lower, overall revenue shortfalls from the pandemic did not materialize in most states. Partially bolstered by e-commerce and the collection of state sales tax from internet transactions, revenue collections increased, producing budget surpluses. These surpluses provided an opportunity for states to enact various tax relief measures.

To put it in perspective, the Fiscal Survey of the States, spring 2022 version, from the National Association of State Budget Officers (NASBO), indicates that general revenue collections have increased in 49 states for the fiscal year 2022. The estimated 3.2% growth in revenue collections for the fiscal year is projected to be followed by a more nominal growth of 1.4% for the fiscal year 2023.

Midway through the fiscal year 2022, the National Conference of State Legislatures (NCSL) also reported that revenue collections remained strong and surpassed expectations based on personal income taxes, sales taxes, and other revenue sources. These budget surpluses from more vital than anticipated revenue collections have spurred state legislatures to debate and pass legislation that reduces taxes and provides economic incentives and other tax credit measures within their budgets for the fiscal year 2023. The Georgia General Assembly, for example, passed HB 1437 this year, which replaces the state’s graduated income tax – the top level of 5.99% – with a flat tax starting at 5.49% that will gradually reduce to 4.99% by 2029.

An overview by the Tax Foundation of tax reform measures within the states included:

  • Individual income tax reductions (10 states).
  • Corporate income tax rate reductions (6 states).
  • Permanent full expensing of capital investments by C corporations in the year of acquisition (Oklahoma – first and only state).
  • Direct rebate to eligible taxpayers (11 states).

Higher revenue collections and surpluses have allowed some states to be more aggressive in spurring economic growth and job creation through tax relief. However, in the short term, inflation and the potential for economic slowdown may lessen the financial benefit of these tax measures for individuals and corporations as the cost of living and doing business increases.

State governments are not immune from the pressures of inflation as well. Additional state funding may be needed to offset increased costs for providing government services, which will lower revenue surpluses.

The infusion of federal relief funds from the American Rescue Plan and the Coronavirus Aid, Relief, and Economic Security Acts has also temporarily bolstered states with additional revenues. However, these federal funds are one-time only outlays to state and local governments to expand public health services and spur economic recovery related to the pandemic.

For instance, the U.S. Department of the Treasury has identified one of the priorities for the Coronavirus State and Local Fiscal Recovery Funds. The goal is to provide governments with the resources to “build a strong, resilient, and equitable recovery by making investments that support long-term growth and opportunity.” However, once expended, the question for state governments is whether to continue or discontinue these federally supported “investments” with state revenue.

Despite revenue surpluses, state legislatures and, in particular, local governments will continue pursuing tax increases to maintain and expand these “investments” and other government services in the long term that will impact commercial real estate. This action has included discussions by legislative bodies about increasing the transfer tax on real estate transactions. NAIOP Corporate and real estate organizations supported a transfer tax study titled “The Unintended Consequences of Excessive Transfer Taxes” to assist chapters in responding to increasing this regressive tax.

The debate on revenue surpluses, tax relief, inflation, and federal funding will continue within state capitols. Most state governments have emerged from the pandemic with revenue surpluses that did not decline as much as expected. This surplus has allowed them to consider tax relief measures for spurring economic activity within their cities and counties. Because of this, NAIOP and its chapters will need to remain engaged to ensure the interests of the commercial real estate industry are protected.

Toby Burke is the Senior Director of State and Local Affairs for NAIOP.

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