Even With Tax Cuts, State Tax Revenues Remain High
The state tax and budgetary implications of One Big Beautiful Bill Act (OBBBA) are bringing renewed attention to state finances. Given significant tax-cutting activity at the state level, many appear to believe that the past five to ten years represent an era of tax revenue in decline. That is far from the case, as this issue of The SALT Road explores.
SALT News and Updates
Delaware passed legislation requiring research and experimentation (R&E) expenses incurred between 2022 and 2025 to remain on a five-year amortization schedule, though first-year expensing, as restored by the One Big Beautiful Bill Act (OBBBA), will be available for future R&E spending. This approach, which limits the initial revenue hit associated with restoring expensing for the past four years of R&E but conforms the policy going forward, may prove a model for other states struggling with the revenue implications of conformity to § 174 as amended by the OBBBA. Unfortunately, the new Delaware law also decouples from § 168(k), to which the state had previously conformed.
As Joe Kristan highlighted, the IRS has announced that it will not limit the tips deduction to “specified service trades or businesses” for tax year 2025, a policy choice that will affect the smattering of states that follow the new federal deduction.
Worth Reading
The National Association of State Budget Officers (NASBO) has released its indispensable Fall Fiscal Survey for 2025—about which, more later.
Even with Tax Cuts, State Tax Collections Remain Robust
More states have cut the rates of major taxes—particularly individual income taxes—in the past five years than during any similar span in the past century. And while the post-pandemic pace has been particularly brisk, the prior five years saw meaningful reductions too, particularly after the enactment of the Tax Cuts and Jobs Act (TCJA) in 2017. The median state’s top wage income tax rate declined from 5.75% to 4.79% between 2016 and 2025.
On net, however, state tax collections have risen in real terms over the past decade. Most tax-cutting states adopted rate reductions from a share of their revenue growth, not through spending cuts.
Sustained economic growth, base-broadening under the TCJA, increased sales tax collections post-Wayfair, inflation, and other factors combined to yield significant revenue gains for states in inflation- and population-adjusted terms over the past decade. Implicitly, therefore, failure to cut tax rates meant large unlegislated tax increases. Even under meaningful tax cuts, state tax revenues often rose.
Nationwide, state tax collections rose 14.5% over the decade even after accounting for inflation and population growth, with increases in 44 states and the District of Columbia. Only three particularly aggressive tax-cutting states—Iowa, New Hampshire, and Indiana—experienced inflation- and population-adjusted reductions of more than 5%.
Because personal income rose so rapidly, however, many states did reduce tax burdens as a percentage of personal income over the past decade. Even here there’s a net national increase of 2.2%, but with much wider variation.
The takeaway: while states are increasingly focused on tax competitiveness, fears of excessive tax cutting are wildly overblown. Most states have funded rate cuts out of a share of their revenue growth.
That conclusion is buttressed by the just-released Fall 2025 Fiscal Survey from the National Association of State Budget Officers (NASBO), which shows inflation-adjusted general fund revenues rising 18% since 2016 despite substantial tax cuts, while general fund expenditures have risen 17%. (Not all general fund revenue is derived from taxes, and not all tax revenue is dedicated to the general fund, hence the difference with the tax collections measured cited earlier—though the two measures have tracked closely.)
States’ general fund revenues have cooled off from pandemic highs, when federal aid to individuals and businesses produced a temporary spike in taxable activity, but they remain substantially above pre-pandemic levels (and above trend). But general fund expenditures have spiked post-pandemic, yielding shortfalls in some states even as revenues remain robust. As lawmakers in California, Maryland, Minnesota, New York, and elsewhere have explored or implemented tax increases in recent years, they have done so not because revenues were low (they weren’t), but because spending demands were rising even faster than revenues.
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Upcoming Topics
Forthcoming issues of The SALT Road will cover, among other things:
a review of a new paper indicating that remote workers’ location decisions are sensitive to income tax but not property tax burdens
analysis of the economic implications of high corporate rates under single sales factor apportionment in light of proposals for a higher corporate rate in New York
an exploration of the trend toward income tax bracket consolidation and the adoption of single-rate income taxes
consideration of the trend toward market sourcing of services in corporate income tax apportionment
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