With a very large revenue surplus to be reported in the coming month, the question becomes – What will lawmakers do with the money? We’ve heard suggestions of continuing to spend it on large projects or do very large WPU value increases, upwards of 15%. Others have suggested giving a $300 million or $400 million tax cut. We’ve heard some suggest that a $300 million or $400 million tax cut is too small, while others say it’s very large. Which one is it? The answer lies in the denominator.
Growth in the State Budget
The state budget comprises revenue from sales tax, income tax, and a host of other taxes. On a broader view, it also includes revenue from the federal government, fees, fines, and other revenue sources. Looking specifically at what lawmakers typically consider – free revenue – revenue will be up almost $4 billion since 2016. That’s growth of almost 60% in just six years. Virtually all of this has been spent.
A $300 Million Tax Cut as a Percent of the State Budget
With this background in mind, how much would a $300 million tax cut be? Looking towards 2022, total revenue to the free revenue bucket of the state government (General Fund/Education Fund) will be around $9.5 billion. Putting $300 million in the numerator and $9.5 billion in the denominator gives a tax cut of 3% for fiscal year 2022. Is 3% small, medium, or large? To answer this, let’s look at how much a $300 million tax cut would have been since 2004.
How much would a $300 million tax cut be in past years? The trend is downwards. In 2004, a $300 million tax cut would have been around 7.4%. In 2008, when policymakers opted for $400 million in tax cuts, the tax cut was around 6%. As mentioned, in 2022, a $300 million tax cut is much smaller at 3%.
A $300 Million Tax Cut Relative to “New” Revenue
Typically, policymakers don’t deal with the large base of revenue, instead focusing on new ongoing and one-time revenue. How much would a $300 million tax cut be of the new ongoing and one-time revenue in the coming legislative session? Assuming a state surplus of $800 million in fiscal year 2021 and 6% growth in fiscal year 2022, legislators will have around $1.3 – $1.6 billion in ongoing revenue and probably at least $800 million in one-time money (and likely much more). Using $1.5 billion ongoing plus $800 million one-time as the numbers, a $300 million tax cut would be around 20% of new ongoing money or around 13% of all money available to spend. Consistent with the prior analysis, a $300 million tax cut seems somewhere between small and medium.
In thinking through whether a $300 million tax cut is small, medium, or large, the answer seems to be that a $300 million tax cut would be somewhere between small and medium. With massive spending in prior years and more to come from the federal government, will taxpayers get some relief this year? You’ll certainly hear about spending pressures from advocates and “non-partisan” analysts, most, perhaps all, of which is justified. A moderately sized tax relief package is also justified. Who will win out this year – taxpayers or spending growth? In reality, it’s not really one or the other. With the amount of money available, spending will grow much faster than almost everyone’s pocketbooks – the question is by how much.