States Should Prioritize Long-Term Stability Over More Tax Cuts

The economic costs of state tax cuts, a surge of new private school voucher programs, the expiration of pandemic aid, and risks to long-standing federal support for public services are all threatening state budgets.

Without thoughtful action, this quadruple threat could impose significant damage on families and communities, public services, and state economies at a time when state revenue has already slowed.

Much of the risk that states face is self-inflicted. This may be most true when it comes to income tax cuts, which policymakers in conservative-controlled states have advanced aggressively in recent years. Since 2021, more than half of US states have cut personal and corporate income tax rates, often deeply.

In states such as Arizona, North Carolina, and West Virginia, the scale of the cuts could rival the disastrous Brownback tax experiment in Kansas from a decade ago—which led to cuts that cost residents more money to attend college and left key highway projects undone, among other failures. A bipartisan supermajority eventually had to reverse the cuts.

In some states, lawmakers have phased in tax cuts over time or tied them to complex trigger mechanisms, obscuring the full cost by spreading out implementation over a series of years. For example, the combined cost of personal income tax cuts and corporate income tax elimination in North Carolina could swell to nearly $14 billion a year by 2031, equal to nearly half the state’s current general budget. Across states, the true tax-cut bill is similarly starting to come due.

The recent increase in private school voucher programs is adding to that bill. In more than half of states, these programs erode state revenue by diverting dollars intended to support public schools into homeschool families and private schools.

They often carry significant hidden costs as well. As states expand eligibility and more families take advantage of the subsidies, more funds are diverted from public schools. That helps explain why universal voucher program costs are already significantly exceeding initial projections in states such as Arizona and Iowa.

States also face two additional pressing threats: the end of pandemic-era federal aid and the risk of new spending cuts from President-elect Donald Trump and the new Republican Congress.

During the Covid-19 pandemic, federal policymakers approved temporary funding that protected schools and helped safeguard public health systems, community programs, and other vital services from significant damage during the crisis. Substantial federal economic relief including enhanced food assistance, and an expanded child tax credit buoyed state revenue by keeping more families afloat and moving more dollars through local economies.

But those funds have now largely run out, further increasing states’ risk for falling revenue or emerging funding gaps.

Meanwhile, emerging Republican proposals to slash federal funding could shift significant costs to states, which may result in cuts to services and benefit levels. This would force difficult decisions about how to maintain critical programs, including those that help families meet their basic needs.

Areas such as Medicaid and annually appropriated non-defense spending—which includes essential services including education, transportation, and housing—are particularly at risk. Federal dollars compose more than two-thirds of all funding for Medicaid, which covers millions of low-income people and is already under threat of state-level cuts in places including Idaho, Utah, and West Virginia. Similarly, cuts to other annual spending could jeopardize road and water projects, undermine public safety, and limit economic growth.

Quality public schools, reliable infrastructure, and safe and healthy communities are crucial for states and their residents to thrive. But they need reliable funding streams, and the siren call of tax cuts often overshadows these long-term needs.

To navigate these challenges, states should resist the tax-cut temptation and focus on raising revenue, pausing or reversing recent tax cuts, and investing strategically in areas that yield long-term benefits. Modernizing infrastructure, funding workforce development programs, and strengthening public education are among the many investments that can help states chart a more prosperous course.

The decisions made in 2025 will reverberate over time. States have a choice: Pursue short-term political gains through additional tax cuts or prioritize long-term stability and their residents’ prosperity. The latter path is harder—but it is the only way to survive.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Wesley Tharpe is senior adviser for state tax policy at the Center on Budget and Policy Priorities in Washington, D.C.

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