Trump's Tax Reform Law is Fueling a Positive Economic Outlook in the States

New Report Shows Closed Loopholes at the Federal Level Are Resulting in Increased Revenue for State Governments

The Utah State Capitol / Getty Images
April 17, 2018

Less than six months old, the tax reform law championed by President Donald Trump is already fueling an increasingly positive economic outlook for state governments across the country.

A new report released Tuesday by the American Legislative Exchange Council (ALEC) found that closed loopholes and deductions at the federal level are resulting in increased revenue at the state level, which when invested properly could provide for greater economic dividends down the line.

The report, titled Rich States, Poor States, is published annually and examines the latest developments in state economic growth, outlook, and competitiveness utilizing 15 equally weighted policy variables. The report found that states with lower tax burdens, decreased pension liabilities, and limited regulatory structures rank highest in economic outlook.

Utah, for the 11th year in a row, grabbed the top spot in the report's rankings. The state's stranglehold on first place was solidified by its decision this legislative session to cut state income taxes. The decision came after estimates conducted by the Office of the Legislative Fiscal Analyst, the nonpartisan budget information arm of the state legislature, found that Utah would see its revenues grow anywhere between $30-$80 million annually upon conforming to the new federal tax law.

Gov. Gary Herbert (R.) told the Washington Free Beacon that Utah's first-place ranking was driven by his state's commitment to building a multifaceted economy.

"Utah's hard-working, problem-solving people are what make our diverse economy one of the most stable in the nation," Herbert said. "Combining that work ethic with fiscally conservative principles like saving for a rainy day and letting market forces work helps our economy thrive."

"All in all, I believe Utah's economic environment and unparalleled quality of life make this the best place to live, to work, and to do business," Herbert added.

Utah's decision to cut taxes in the face of increasing revenues mirror a decision facing state governments across the country. States like Maryland ($28.7 million), Washington ($85 million), and Kansas ($83.6 million), among others, have seen their revenue bases widen, igniting a conversation on how lawmakers should invest in fostering greater economic growth.

Jonathan Williams, vice president of the ALEC Center for State Fiscal Reform who helped craft the report, said that increasing state revenues are an overlooked and unexpected consequence of the new tax law.

"The untold story of federal tax reform is its impact at the state level, where the vast majority of states are now enjoying unexpected revenue gains," Williams said. "This trend is empowering additional pro-growth tax reform efforts that will provide an added level of benefits for hardworking taxpayers."

While Utah's place at the top was secure and rested on decades of strong fiscal leadership by the state's elected officials, Idaho was the report's clear success story. The state's catapult to the number two spot (it was 10th last year) was fueled by the decision to pass along tax reform savings directly to taxpayers.

When the Idaho State Tax Commission estimated that conforming to the new federal tax law would result in an additional $97.4 million for state coffers, lawmakers reciprocated by passing the largest tax cuts in state history. The cuts, championed by Gov. C.L. "Butch" Otter (R.), slashed the state's income and corporate tax rates and created a new child tax credit to help working families.

Otter told the Free Beacon that he welcomed the report's release and that it stood as a testament to the hard work Idaho has undertaken in creating an economic environment where individuals and businesses can prosper.

"This report provides welcome recognition of the work that Idaho has done to make our state as competitive as possible in the attraction and retention of businesses, investment, and the people who appreciate keeping more of their hard-earned dollars," Otter said.

Idaho wasn't the only state to see a large leap after cutting taxes in the face of growing revenues. Georgia, which ranked number 17 on ALEC's ranking last year, jumped to 11th place.

Arthur Laffer, who served as a key economic adviser to President Ronald Reagan and helped author the report, said he was encouraged by the decision of states to cut taxes and believes more will follow suit.

"I’m optimistic that we may see 25 to 30 states cut taxes thanks to the federal tax overhaul," Laffer said.

The states that ranked at the bottom of the list tended to be heavily industrialized with higher tax burdens. These states were particularly disadvantaged when the federal tax overhaul capped the State and Local Tax (SALT) deduction, which for years had served as a public subsidy for high-tax states. Under SALT, taxpayers in states like New York, Illinois, and California, could deduct their state and local taxes when calculating federal income taxes--resulting in a large portion of their local taxes being refunded from federal funds.

Since the federal tax law went into effect, these high tax states have failed to adapt. Williams expressed his belief this would prove troublesome as they continue to compete with lower-tax states to bolster economic growth.

"As states compete with each other for much-needed human and financial capital, there is a clear trend in favor of taxpayer-friendly, market-oriented reforms," Williams said.

Published under: Economy , Tax Reform , Taxes