States suggest billions in tax aid regardless of financial uncertainty

Measures beneath dialogue in additional than a dozen states range extensively however the development cuts throughout political divides: Governors and state lawmakers are on the lookout for methods to present taxpayers a break.

“Building the following New Jersey means creating an financial future that uplifts every of us and works for all of us,” Mr. Murphy said. The governor was expected to unveil the tax breaks Tuesday afternoon during a speech in Trenton.

A year ago, states were swimming in cash from federal pandemic relief programs and higher-than-projected sales and capital gains levies. Reserve funds have collectively grown 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 downturn. Tax cuts, they said, should be considered with caution.

The sector outlook for state governments in 2023 is deteriorating but stable, Eric Kim, the head of U.S. state ratings for Fitch Ratings, said recently.

“Enacting significant tax policy changes amid an uncertain economic environment increases the risk of unexpected consequences,” mentioned Mr. Kim, who has tallied 17 states which have proposed tax cuts or rebates this 12 months.

The Northeast has seen a spate of proposals. In New Jersey, Mr. Murphy, a Democrat, additionally plans to make a full $7 billion cost towards the state’s underfunded pension liabilities and can improve reserve funds to $10 billion. Massachusetts Gov. Maura Healey, a Democrat, this week mentioned her coming finances proposal will embrace a discount within the state’s capital-gains tax in addition to a brand new $600 tax credit score for dependent kids and seniors. Ned Lamont, the Democratic governor in Connecticut, not too long ago proposed the primary income-tax price lower for that state in virtually 30 years.

The tax-relief efforts differ in dimension and scope, from Michigan laws that might make pension funds tax-exempt to Mississippi Gov. Tate Reeves’s multiyear push to remove his state’s earnings tax.

“Our state is in the very best monetary form in historical past and our residents should get a much bigger piece of the pie,” Mr. Reeves, a Republican, said in his state of the state address, adding that he wanted Mississippi to compete with states such as Florida, Tennessee and Texas that have no individual income taxes.

Mr. Reeves said growth in the state’s overall personal income made it possible to cut tax rates. Virginia Gov. Glenn Youngkin, a Republican, proposed using part of a $3.6 billion surplus for an additional $1 billion in tax relief for the second year of a biennial budget adopted in 2022.

And some states and cities are ramping up their pursuit of new jobs by showering companies with big tax breaks. States and local governments, including in Georgia, Michigan and West Virginia, agreed to give out at least $1 billion in subsidies eight times in 2022, according to an analysis from Good Jobs First, a nonprofit research group that is often critical of subsidies.

States raise funds from a different mix of sales, income and severance taxes. Thirty-three states reported receiving more revenue than projected in their current fiscal years, according to Nasbo. Budget proposals for the coming fiscal year, which in most states starts on July 1, are projecting nominal growth in collections, Nasbo said.

California, whose budget is particularly reliant on income taxes levied on some of its wealthiest residents, experienced budget whiplash after a record $97 billion budget surplus last year dissolved into an estimated $22.5 billion deficit in Democratic Gov. Gavin Newsom’s January spending proposal.

Recent revenue data and analysis from the nonpartisan Legislative Analyst’s Office suggest the shortfall could be billions more by the time Mr. Newsom submits a revised spending plan in May. The anemic collections are partly explained by the decrease in initial public offerings for tech companies, which can provide windfalls for founders and early investors that are taxed as income. There were 168 in 2022 versus 1,035 in 2021, the LAO said.

In New York, tax collections that rely heavily on the financial sector are expected to peak this quarter, acting Budget Director Sandra Beattie said earlier this month. The state, where Democratic Gov. Kathy Hochul isn’t proposing cutting income taxes, projects it will end its current fiscal year with an $8.7 billion surplus but anticipates slower growth will lead to deficits totaling $22 billion over three years starting in the 2024-25 fiscal year.

“We are therefore harvesting the gains of the last two years to prepare for the uncertainties ahead,” Ms. Beattie mentioned.

Ms. Hochul has proposed greater payroll taxes on downstate companies to bolster mass transit in New York City, and unions and progressive lawmakers in New York have held rallies calling for extra levies on high-income people to lift cash for elevated spending on social applications. Carl Davis, analysis director for the Institute on Taxation and Economic Policy, a progressive suppose tank, mentioned states ought to be cautious about reducing taxes now.

“I feel it’s been disappointing to see the extent to which state lawmakers have adopted a tax-cuts-first mentality. Quite a lot of the problems we’re coping with proper now are going to require extra state income, not much less,” he said, without mentioning a specific state.

In Connecticut, Mr. Lamont proposed cutting the rates of the state’s lowest tax brackets and expanding a credit for low-income filers. The changes will together cost around $500 million a year in the state’s $25 billion budget, officials estimate. Targeting the tax cut to middle-income filers helped make it sustainable, said Jeffrey Beckham, secretary of the Office of Policy and Management.

“I want a sustainable tax cut that we can support in good times and not-so-good times,” Mr. Lamont, a Democrat, mentioned in an deal with to lawmakers. “We’ve had quite a few false begins—on once more, off once more tax cuts. Not this time.”

—Christine Mai-Duc contributed to this text.

Write to Jimmy Vielkind at jimmy.vielkind@wsj.com