States that have prioritized tax cuts over public investment are now facing serious budget constraints, making it harder to fund new initiatives or expand baseline services, including public education, health care, transportation, and more.
After several years of revenue collections surpassing projections, state tax growth is slowing, leaving many states struggling to provide essential services that families, workers, and communities rely on. A major contributor to the weakening revenue trend is a series of income tax cuts passed since 2021, which have begun to take a toll on state budgets.
Take North Carolina, for instance, where the state’s budget director recently pointed to deep income tax cuts enacted in recent years as the primary driver of “sluggish tax revenue growth,” jeopardizing that state’s ability to fund key priorities. States like Arizona and West Virginia are also facing immediate fiscal challenges, in large part because of ill-advised tax policies, with policymakers scrambling to fill holes in community college funding and Medicaid programs.
The fallout from these tax cuts is exacerbated by other economic factors, including a weak stock market in 2023 and high interest rates curbing consumer and business borrowing. Historic federal investments during the COVID-19 pandemic helped keep money flowing through state economies, but now that aid is expiring. Nationwide, governors’ recommended budgets for the 2025 fiscal year were down 6.2 percent from the prior year’s estimated spending levels. While the situation remains manageable in some states, continued revenue declines could lead to deeper cuts in essential services, including public education.
It didn’t have to be this way. Over the past four years, more than half of states have reduced their personal or corporate income tax rates, and in many cases both, benefiting wealthier households and slashing billions from public coffers. From July 2023 to June 2024, a span corresponding to the prior fiscal year in most states, 26 states reported inflation-adjusted declines in personal income tax collections, with nine states experiencing double-digit drops. Corporate income tax revenues are also down in 30 states, 13 of which saw double-digit declines.
States experiencing declining revenues will need to reconsider their tax policies or face the risk of further cuts to vital services upon which millions of residents rely. A good place to start would be looking to states like Massachusetts, Minnesota, and Washington, where policymakers have instead chosen a different path, opting to pursue revenue-raising policies focused on the wealthiest residents and corporations. These states have been able to maintain or even increase revenues to fund public schools, expand child care, address climate change, or advance other vital priorities.