What Polarized Government Means for Tax Policy in 2019
A total of 37 states are under one-party control. While that usually means legislation moves quickly, it doesn't always equate to better fiscal policies.
State government is the most polarized it's been in recent memory. In all but 13 states, one party holds a trifecta, controlling both chambers of the legislature and the governorship.
But while one-party dominance tends to mean that legislation moves faster, that hasn't always meant better fiscal policy. “When you have a trifecta come into place there’s the ability for a state to ultimately think in a completely partisan manner," says Brian Kirkell, principal at the tax consulting firm RSM. "In either direction -- left or right -- partisan tax policy isn’t always the best policy.”
Take Kansas. When it became a Republican trifecta in 2011, state lawmakers, at the behest of Republican Gov. Sam Brownback, quickly passed a series of income and business tax cuts that led to years of budget deficits. Things got so dire that the Republican legislature in 2017 overrode Brownback to get rid of the cuts and balance the budget.
On the other side of the political divide, there's Connecticut. For years, it was one of the few trifectas held by the Democrats. During that time, the state had a series of budget deficits and suffered from runaway spending. When the trifecta briefly came to an end, lawmakers ultimately approved a budget that reined in spending while avoiding major tax cuts. Senate Republicans even got $1 billion for the state’s rainy day fund.
Most of the new trifectas are in Democratic states. During the midterms, the party picked up six states. Still, Republican hold the most trifectas, controlling 23 states to the Democrats' 14.
That said, Kirkell will be closely watching how trifectas in Democratic states affect tax policy since control is so new there. He predicts that states with new Democratic trifectas will focus on policies such as expanding the sales tax base, increasing income tax rates for high-income earners and restoring tax breaks eliminated by federal tax reform.
In Colorado, for example, Gov. Jared Polis wants to eliminate a 20 percent deduction for so-called "pass-through" businesses, such as LLCs and sole proprietorships, passed under 2017's federal tax overhaul. Polis wants to use that money to help pay for an income tax cut.
In some cases, a partisan government is likely to grease the wheels for long-held-up tax policy. For instance, Robert Duffy, a professor of political science at Colorado State University, predicts that Colorado is now likely to be successful in solving complicated transportation and education funding problems that have long-plagued the state under a divided government.
Beyond trifectas, polarization is -- unsurprisingly -- likely to slow things down. In Kansas, newly elected Democratic Gov. Laura Kelly is already being criticized by Republican lawmakers for her proposal to increase spending. “All of the gains from the massive 2017 state income tax increase have been absorbed,” state Rep. Paul Waggoner recently wrote in The Hutchinson News. “If Kelly pushes spending growth ahead of current revenues, she is really just pushing for another tax hike.”
In Wisconsin, which lost its Republican trifecta when Democrat Tony Evers was elected governor, some lawmakers are hoping to push through major tax reform to spur economic growth. But, acknowledges Katherine Loughead, a policy analyst at the Tax Foundation, divided governments are often a roadblock to such sweeping legislation.
“You can see legislators on both sides of the aisle realizing that every dollar raised is not created equal, that some taxes are a lot more damaging to economic growth,” she says. “So right now, you’re seeing a lot of rhetoric about working together. But whether that’s actually going to happen…remains to be seen.”
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