President-elect Donald Trump has put forward a proposal that includes substantial tax reductions for both individuals and businesses, aiming to implement reforms worth trillions of dollars. In various states, governors and legislators are also pursuing additional tax cuts amounting to millions, despite the fact that many states have already reduced income, sales, or property taxes in recent years. This push for further tax reductions comes at a time when state revenue growth is either stagnant or slowing.

As Congress deliberates on Trump’s tax reduction plans, state legislatures are convening to assess their capacity to cut taxes while still ensuring adequate funding for essential government services such as education, corrections, infrastructure, and social programs. Unlike the federal government, which can operate with a deficit, most states are required to maintain balanced budgets.

Trump’s tax reform vision encompasses extending existing income tax cuts that were initially enacted in 2017. Some of these cuts are scheduled to expire soon, potentially adding around $4 trillion to the national deficit over the next decade if extended. Additionally, Trump is advocating for a reduction of the corporate tax rate to 15%, building on the previous cut from 35% to 21% during his administration.

During his campaign, Trump suggested that certain earnings, such as overtime pay, tips, and Social Security benefits, should be exempt from federal income tax. If these suggestions are implemented, they could lead to further tax cuts at the state level. In 18 states along with Washington D.C., changes in federal income tax directly impact state tax systems unless those states specifically choose to opt out. Other states must actively adopt new federal adjustments for them to apply to state taxes.

After the economic rebound from the pandemic, many states found themselves with large budget surpluses and substantial federal aid, which encouraged a wave of tax cuts across the country. However, state revenues have started to plateau, influenced in part by these tax cuts. For the current fiscal year, state budgets forecast a modest 1.9% rise in general fund revenues, as reported by the National Association of State Budget Officers.

Recent data indicates a slight decline in overall state tax revenues—down 0.6% from July to November—prompting analysts to recommend that states reconsider their tax reduction strategies in light of these “weak” revenue conditions. Conversely, some experts argue that while tax revenues have decreased from their highs, they still remain robust and above pre-pandemic levels when adjusted for inflation.

As 2025 approaches, a trend is emerging where more states are leaning towards tax cuts rather than increases. Despite tighter budget conditions, state fiscal experts note that there is considerable interest among lawmakers in providing tax relief.

In Kentucky, for example, the legislative session has already seen the Republican-controlled House pass a bill aiming to decrease the individual income tax rate to 3.5% by 2026, a move that Democratic Governor Andy Beshear has indicated he supports. Missouri’s new Governor, Mike Kehoe, is considering a gradual elimination of the state income tax, while governors from Montana, Georgia, and South Carolina are proposing additional reductions in income tax rates.

Utah’s Governor Spencer Cox has initiated plans to eliminate taxes on Social Security payments, whereas Virginia’s Governor Glenn Youngkin is advocating for the removal of state income taxes on tips, alongside efforts to mitigate automobile taxes for low- and middle-income residents. Interestingly, even Democratic Governor Kathy Hochul of New York has introduced a comprehensive tax plan aimed at reducing income taxes for the majority, expanding child tax credits, and offering up to $500 in what she terms an “inflation refund.”

In Mississippi, new legislation is in the works to gradually abolish the income tax while simultaneously lowering grocery sales taxes, albeit with plans to offset this through local sales and gas tax increases. Louisiana’s recent income tax cuts are being balanced out by an increase in sales tax.

Beyond income taxes, some states are prioritizing property tax relief given rising housing costs. In North Dakota, a measure proposed to eliminate local property taxes based on assessed value was rejected by voters, yet Republican Governor Kelly Armstrong is pushing to gradually reduce property taxes by utilizing state oil tax revenue. In Wyoming, members of the Freedom Caucus are seeking to cut residential property taxes by 25%.

Kansas is exploring various tax initiatives, including a proposed 7.5% reduction in school property tax levies, while Nebraska’s Governor Jim Pillen has recently unveiled plans to enhance property tax relief.

Overall, as states navigate their tax policies, debates and legislative actions surrounding tax cuts and fiscal responsibility are expected to continue shaping the fiscal landscape in the months and years ahead.