I scanned and inventoried the policies proposed or implemented at the state level according to publicly available information in media outlets and found that bills to suspend gas taxes have been introduced in at least 20 states and bills to provide residents with tax rebates, credits, or stimulus payments have been introduced in at least 16 states. At least three states—California, Connecticut, and Hawaii—are considering policy solutions that offer alternatives to driving.
California’s governor is proposing, among other things, to make public transit free for three months and to make additional investments in pedestrian and biking infrastructure. Connecticut passed a bill that suspends public bus fares for as long as their excise tax on gas is suspended. And Hawaii’s legislators are proposing subsidizing nonmotorized vehicles.
A new report from the Urban Institute catalogs state-level responses and finds that 20 different states have introduced legislation to suspend gas taxes, which are often used to fund infrastructure projects. (Florida, Georgia, and Maryland have already passed gas tax holidays.) There are 16 states considering legislation to provide payments to residents — in the form of tax rebates, credits or stimulus checks — to counteract pain at the pump. Only three are considering changes to help people avoid driving: California, Connecticut, and Hawaii.
“Of the three main categories of policy solutions we could be considering, cutting gas taxes is the worst,” says Jorge González-Hermoso, research associate with the Urban Institute. “It’s very popular, it will get you headlines, but it only creates a simulation that the government is providing a solution.”
González-Hermoso says the problems with gas tax holidays start with the premise that they help consumers. The average gas tax across all states, he reports, is 31 cents a gallon or 7.75 percent of the average price. By one estimate, a driver would have to use 20 gallons of gas a week to save just $30 over the course of Maryland’s one-month holiday. There is no guarantee that station owners wouldn’t pocket the difference, and keep prices roughly the same.
In addition to being ineffective, this policy imperils future infrastructure projects. State and local gas taxes comprise 26 percent of highway spending and often contribute to mass transit as well. They also have the disadvantage of incentivizing driving, as residents in nearby jurisdictions try to take advantage and local consumers know relief is contingent upon buying gas.
You need money to make money, and the programs long in trouble didn’t have enough assets on hand to take full advantage of a banner year. Say your plan started 2021 with a funding level of 80 percent (meaning you had enough assets to cover 80 percent of your anticipated liabilities). With a 30 percent return, your plan would then be 104 percent funded. But if you only started with a 30 percent funding level, the same percentage gain would bump you up only to 39 percent funded.
“The problem of a deeply underfunded plan is that they don’t have a lot of assets, so big returns aren’t as helpful to them,” says Donald Boyd, co-director of the Project on State and Local Government Finance at the University at Albany. “They’ve still got a huge way to go.”
Maintaining discipline has been hard. When pension plans have a good year, as in 2021, there’s a temptation for legislators to skip contributions. This would be akin to an individual seeing her retirement account gain $10,000 and figuring she can skip that year’s $5,000 contribution.
The problem is that you have to maximize your gains in good years, not fritter them away, because inevitably you’re going to have to make up for bad years at some point. “When politicians have a lot of money around, they tend not to put it in the fund,” says the Urban Institute’s Johnson. “When things are bad, they kick the burden down the road and let future taxpayers worry about it.”
Did it work? In a new paper with my Tax Policy Center colleague Claire Haldeman, we conclude that, consistent with these goals, TCJA reduced marginal effective tax rates (METRs) on new investment and reduced the differences in METRs across asset types, financing methods, and organizational forms.
But it had little impact on business investment through 2019 (where we stopped the analysis, to avoid confounding TCJA effects with those of the COVID-related shutdowns that ensued). Investment growth increased after 2017, but several factors suggest that this was not a reaction to the TCJA’s changes in effective tax rates.
But PTE taxes create inequities based on type of income. For example, because these states now favor pass-through income over wages, a partner in a law firm can be effectively exempt from the SALT cap while an executive assistant or associate in the same firm remains subject to the deduction limitation. A doctor who is an employee of a corporation is barred from fully deducting state and local income taxes while a partner in a medical practice making the same income is exempt from the federal cap for these taxes.
Because the rules differ across states, businesses need to consider where partners live and where business income is generated. For example, non-resident partners might not benefit from the credits in their home state. Like New York, some states of residence allow credits against the taxes these partners owe from other states. But that isn’t always the case.
Keep in mind that these PTE taxes may be just a temporary fix. Congress may consider changes to the SALT cap in coming legislation. And the cap, along with all other individual tax changes in the TCJA, is scheduled to expire at the end of 2025.
Colorado recently became the 14th state to enact the new workaround, which allows (or in Connecticut’s case, requires) pass-through businesses to pay state income taxes at the entity level rather than on their personal income tax returns. For small businesses like partnerships, declaring that income as a business instead of passing it through to their individual tax returns means the state taxes paid on that business income don’t count toward their SALT cap.
The new mechanism is called a pass-through entity (PTE) tax, which is exempt from the $10,000 cap on the state and local tax (SALT) deduction that was part of President Trump’s 2017 tax reform. For business owners in high property tax states like New Jersey and Connecticut, it’s a critical change because it allows those taxpayers to deduct more of their local taxes from their other personal income.
Life expectancy in the United States between 2018 and 2020 decreased by 1.87 years (to 76.87 years), which is 8.5 times the average decrease in other high-income nations. What’s more, decreases in life expectancy among Hispanic and non-Hispanic Black people were about two to three times greater than in the non-Hispanic White population, reversing years of progress in reducing racial and ethnic disparities. The life expectancy of Black men (67.73 years) is the lowest since 1998.
Those are key findings of a study conducted by researchers at the Virginia Commonwealth University School of Medicine, the University of Colorado Population Center and the Urban Institute in Washington, D.C., and published in The BMJ — a peer-reviewed medical trade journal of the British Medical Association.
This situation highlights one of many challenges President Biden’s day-one executive order on racial equity aims to resolve. If federal policymakers want to address racial disparities, they should collect and release detailed, disaggregated data. But they must also carefully consider the unintended harms they could cause to the people they are trying to help.
But Richard Johnson, director of the Urban Institute’s Program on Retirement Policy, argues that he has a better idea — one that would generate more tax revenue for Social Security benefits without creating a donut hole, he tells ThinkAdvisor in an interview.
“Increase the $142,800 tax max to something like $250,000 today and continue to raise it [based on] average earnings growth,” he recommends.
Part of Johnson’s reasoning is rooted in the presumption that if Social Security were to be perceived as only for low-income earners, political support for the crucial program would be diminished.
Throughout the debate over stimulus measures, one question has repeatedly brought gridlock in Washington: Should the states get no-strings federal aid?
Republicans have mostly said no, casting it as a bailout for spendthrift blue states. Democrats have argued the opposite, saying that states face dire fiscal consequences without aid, and included $350 billion in relief for state and local governments in President Biden’s $1.9 trillion federal stimulus bill, which narrowly passed the House this past weekend. It faces a much tougher fight in the Senate.
As it turns out, new data shows that a year after the pandemic wrought economic devastation around the country, forcing states to revise their revenue forecasts and prepare for the worst, for many the worst didn’t come. One big reason: $600-a-week federal supplements that allowed people to keep spending — and states to keep collecting sales tax revenue — even when they were jobless, along with the usual state unemployment benefits.
Of those states suffering at least a 3% drop in revenue since the start of the pandemic in March 2020, two-thirds (eight in 12) are red states. Alaska, Florida, North Dakota and Texas are seeing some of the worst revenue losses of 9% or higher over the comparable period in 2019, according to the latest data from the Urban Institute.
Across the 47 states from which the institute has full data, total state tax revenues were down by $14 billion in the first ten months of the pandemic (between March and December 2020) compared to the same period a year earlier. That’s an average drop of 1.8% and is largely driven by declines in sales tax revenue.