In a notable shift from the tax-cutting trend observed over the past three years, several U.S. states are now facing headwinds as declining revenues and tighter budgets pose challenges to further reductions in income, sales, property, and gas taxes. This trend, driven by budget surpluses in recent years, is encountering obstacles as pandemic-era revenue surges fueled by federal spending and inflation begin to recede.

Almost every state, except Alaska and Nevada, participated in this tax-cutting wave, making either permanent reductions or implementing one-time rebates and temporary suspensions. However, as 2024 legislative sessions commence, the outlook for additional tax cuts appears to be slowing.

The impact of this shift is evident in states like California, where a projected budget deficit of a record $68 billion looms, exceeding even substantial reserves. Other states, including Arizona, Maryland, and Minnesota, are also grappling with fiscal challenges as tax revenues decline and spending surpasses forecasts.

While it’s challenging to pinpoint the exact contribution of tax cuts to these shortfalls, the widespread implementation of tax reductions is recognized as a factor. A recent report by the National Association of State Budget Officers estimates that state-level tax reductions will result in $13.3 billion less in general revenue this year compared to what states would have collected otherwise.

The Tax Foundation notes that the past few years marked the largest wave of individual income tax rate reductions since states introduced such taxes over a century ago. However, Alaska and Nevada, both without individual income taxes, stand apart from this trend.

As states grapple with budget shortfalls, some are considering alternatives such as property tax relief. Colorado recently approved legislation increasing residential deductions for property tax purposes, while Kansas lawmakers are expected to explore proposals to rein in local property taxes in 2024.

While the trend of income tax cuts may slow, the focus on property tax relief could gain momentum as lawmakers respond to constituents’ concerns about rising property tax bills. Despite the challenges, states ended their 2023 fiscal years with a record $407 billion in total savings and cash balances, providing a buffer against declining tax revenues.

As the fiscal landscape shifts, states find themselves at a critical juncture, navigating the delicate balance between providing tax relief and ensuring financial stability in the face of evolving economic realities.