Tracking State Disinvestment in Public Services

As states’ 2024 legislative sessions continue, several states are beginning to experience the fallout from counterproductive fiscal policy decisions made over the past few years. The combined effects of large tax cuts, costly new school voucher programs, and other factors such as expiring federal fiscal aid are starting to make themselves felt — a trend that’s likely to continue. We’re launching a new CBPP resource, Tracking the Fallout of State Tax Cuts, to trace the impact on public services and the consequences for communities.

Several states are already facing tough choices about adequately funding their existing budgets or seeing some early warning signs about their ability to do so down the road. For example:

• In Arizona, lawmakers are scrambling to address an unexpected budget shortfall and avoid harmful cuts in public services after the state’s massive 2022 tax cuts and significant expansion of its private school voucher program both proved costlier than anticipated.
• In Mississippi, a major credit rating agency cited the state’s 2022 tax cut — the largest in state history — in its recent decision to downgrade the state’s credit outlook. If the negative trend continues and credit agencies take the additional step to downgrade the state’s bond rating, it would cost the state millions in higher interest payments and make it harder for policymakers to access funds for improving roads, schools, water quality, and other long-neglected public assets.
• And in West Virginia, a massive income tax cut enacted last year that’s heavily tilted toward wealthy households is furthering a trend toward austerity budgets. In recent years, underfunding has forced the state to forgo building repairs, leave jobs unfilled in jails and prisons, and lay off faculty and discontinue many degree programs at West Virginia’s flagship public university.

The growing pressure on funding for public services doesn’t come as a surprise. The past three years have seen a historic wave of state tax-cutting, as more than half of the states slashed their income taxes — in some cases by extraordinary amounts, and often accompanied by gimmicks to mask the full cost, such as triggers and phase-ins.

In Kentucky, North Carolina, and West Virginia, mechanisms now in place could eventually eliminate taxes on personal or corporate income altogether, with devastating effects on state services and outsized gains for taxpayers at the very top. The tax-cutting trend has continued into 2024, with Colorado, Georgia, Idaho, Iowa, and Utah having already cut rates this year, a major tax cut in Hawaii currently awaiting the governor’s likely signature, and states such as Arkansas, Kansas, Louisiana, and Oklahoma potentially following.

Many states have gone beyond income tax cuts to layer on additional harm, particularly through a rapid proliferation of private school voucher programs that redirect money away from public schools and toward private schools (often with little accountability) or home-school families. Some others are also considering drastically cutting or even eliminating state and local property taxes, which would fundamentally undermine public funding of public education — a bedrock of our nation’s democratic system.

Meanwhile, the expiration of remaining federal aid for schools will likely put additional strain on state and local education budgets, and other COVID-response fiscal aid that federal policymakers provided for a range of state and local needs is drawing to an end as well.

The combined effects of these forces on state revenues and services are already starting to peek through, and history suggests worse is yet to come. In the decade following the Great Recession of 2007-2009, for example, widespread cuts in state personal and corporate income tax rates led to harms such as sharp increases in public college tuition, cuts in school funding, and a weakening of income supports like unemployment insurance — all of which hurt people and communities and slowed economic recovery.

Our new resource will highlight cases where state decisions to cut or divert revenues are jeopardizing funding for current public services, such as K-12 schools and health care, and preventing states from investing to meet emerging or long-standing needs such as updating aging infrastructure, expanding Medicaid, or reducing families’ child care costs. We’ll also highlight new state tax cut proposals, identify emerging tax policy trends, and show how decisions on tax policy can affect efforts to reduce income inequality, make progress on racial equity, or even protect democracy.

It will take time for the damage from this most recent wave of counterproductive state policy choices to fully emerge, and the specific impacts will vary from state to state. But this resource will strive to capture that story as it unfolds. It will also help policymakers and others understand that tax cuts come with tradeoffs, and that some states have taken a different and better approach: rejecting policies that undermine vital public services in favor of ones that protect and raise revenues to support investments that help all families and communities thrive.