Nearly all Americans have felt the impact of “stimulus” spending signed into law by Presidents Donald Trump and Joe Biden. Inflation has topped 8 percent and prices for everything from food to gas to timber for home construction has soared through the roof. For all the financial turmoil inflicted on U.S. households, federal and state policymakers are making extraordinarily poor use of this newly printed money … for the most part. Fortunately, some governors and state lawmakers have decided to give these dollars back to the American people in the form of tax relief. More politicians should learn from their example, while making sure that spending is kept under control.
According to a July 5 report from The Washington Post, elected officials (primarily in red states) are using federal relief funds to cut a variety of taxes. For example, Florida Gov. Ron DeSantis (R) used these dollars to pause the state’s fuel taxes and deliver $200 million in relief to Floridians. Mississippi lawmakers signed onto a plan to lower top state income tax rates to 4 percent from 5 percent, while Georgia is set to flatten its brackets and reduce rates from 5.75 percent to 4.99 percent. Even blue states have been getting in on the action. Illinois has enacted a property tax rebate of $300 per homeowner and New Jersey is pioneering an ambitious $2 billion property tax relief program. Policymakers have been especially sensitive to their constituents’ concerns about spiking grocery prices. Illinois, Kansas, and Tennessee are leading the charge to roll back grocery taxes.
State and local tax cuts spurred by federal funds have proven controversial because the American Rescue Plan Act (ARPA) bars states from, “directly or indirectly offset[ting] a reduction in net tax revenue” using Fiscal Recovery Funds. However, federal courts have found that this language impermissibly coerces states by denying them their fiscal autonomy and goes far beyond normal “strings attached” to federal spending packages. In addition, Congress failed to clarify the meaning of an “indirect offset,” a troublingly vague phrase with disturbing implications. Under a broad reading of that text, a state or local tax cut enacted three years post-ARPA could be struck down because ARPA funds indirectly freed up long-run funds for tax cuts. The legal fight over the language in ARPA is far from over, but for the time being, states seemingly have a free hand to cut taxes as they wish.
And that’s a good thing, because tax cuts are linked with bolstered growth and prosperity over the long term. According to a comprehensive 2022 review of the evidence by the Tax Foundation, “[r]esearch almost invariably shows a negative relationship between income tax rates and gross domestic product (GDP).” Reduced rates do far more than make the country’s economic accounting look rosier. Flattening tax brackets and lowering rates is linked to higher real wages and an increased, “likelihood of an employed head of household obtaining a better job within a year…”
Because of this strong link between tax cuts and growth, policymakers should be especially wary about reckless spending on the federal level as a way to “help” people. Persistently high deficits will eventually require higher federal taxes, effectively cancelling out tax cuts at the state and local level. Congress can avoid this scenario by signing onto a sustainable deficit reduction program that zeroes out unneeded spending such as the wasteful F-35 program and out-of-control farm subsidies. Americans can reap the reward of lower taxes at all levels of government, but only if lawmakers embrace fiscal responsibility.
By David Williams | The Taxpayers Protection Alliance