Why these governors are providing tax breaks to residents on gas, groceries and their income tax bill

Originally Published: 26 MAR 22 12:04 ET

By Tami Luhby and Maeve Reston, (CNN) -- Facing families who are angry about the financial bite that high gasoline and grocery prices are taking out of their budgets, many governors are dipping into flush state coffers to offer relief in the form of rebates, gas tax suspensions and income tax refunds and cuts as they try to avoid voter backlash at the polls in November.

Just this past week, California Gov. Gavin Newsom, a potential future Democratic White House contender who is gliding toward reelection in November after fending off last year's recall, rolled out a $9 billion proposal to hand out $400 debit cards to California drivers to help soften the impact of the nation's highest gas prices. And in Georgia, Republican Gov. Brian Kemp -- who is facing one of the toughest reelection races in the country -- signed a bill Thursday that will give between $250 and $500 in tax refunds to Georgians -- a move several of his rivals immediately blasted as election-year politicking. As she faces a bruising reelection campaign in Maine, Democratic Gov. Janet Mills has proposed some of the most generous relief to qualified taxpayers in her state -- in the form of $850 checks -- to cushion the blow of inflation and gas prices.

The proposals and bill-signings are just a few examples of how ambitious and, in some cases, politically vulnerable governors are trying to show voters that they empathize with the current economic pressures, particularly in the midst of gas price hikes related to Russia's invasion of Ukraine. In ads across the country, Republicans are trying to use inflation to knock President Joe Biden and Democrats who control Congress. Meanwhile, Democrats, in a year in which they were already expected to face headwinds as the party in power, are still struggling to find a unified response that connects with what voters are feeling.

Jessica Taylor, who analyzes Senate and gubernatorial races for the Cook Political Report, noted that many governors have the advantage of budget tools that can provide immediate relief, unlike congressional lawmakers in a deeply polarized Washington. While some of the most vulnerable Senate Democrats, led by Sens. Mark Kelly of Arizona and Maggie Hassan of New Hampshire, are pressuring their colleagues and the administration to suspend the federal gas tax, for example, that could be a long and drawn-out debate in Washington. By contrast, many governors with cooperative legislatures can work quickly to cut checks.

"During the Covid-19 pandemic, voters really began to see how much of an impact governors have on their daily lives," Taylor said. "It's the economy right now that is the No. 1 issue, so whether it's gas taxes, grocery taxes ... it's never a bad idea to find ways to put more money in people's pockets, but especially during an election year, when they're going to remember that they might have gotten that few extra hundred dollars, which can make a big difference in a family struggling."

Because voters are most likely to blame the party in power for the hardships they are facing, Democrats -- including Biden -- risk appearing tone deaf if they continue to point to encouraging economic indicators.

"If you're not feeling it at your kitchen table, and your grocery budget is higher and your gas bill is higher, those statistics don't matter to you," Taylor said.

Giving residents a break at the pump

States have benefited from solid economic growth and federal coronavirus relief funds flowing to them, their residents and their businesses. This has fueled growth in income and sales tax revenues and left many states with large surpluses. (The American Rescue Plan Act bars states from using the state aid in the package to cut taxes, though that provision is now tied up in federal courts.)

Many governors and lawmakers are using the windfalls to take aim at one of the most visible pain points for their residents: high gas prices. As of Friday, a gallon of gas cost $4.24 on average nationwide, up from $3.57 a month ago -- though down a bit from $4.33 in mid-March, according to AAA.

At least three states have already adopted gas tax holidays and many others are considering it.

Last week, Maryland Gov. Larry Hogan, a potential 2024 GOP presidential candidate, signed legislation enacting a 30-day suspension of the state's 36.1-cents-a-gallon motor fuel tax. The governor, who cannot seek reelection because of term limits, told WBAL Radio this week that he supports extending it to a total of 90 days, if the legislature approves it. The holiday, which will cost the state about $100 million a month, is being funded by Maryland's historic surplus, estimated at $7.5 billion over a two-year span.

A 90-day gas tax break is also being pushed by Maryland Comptroller Peter Franchot, a Democrat who is running to replace Hogan as governor.

In Georgia, Kemp is also temporarily halting gas taxes, in addition to providing refunds.

"In the coming days, the suspension of the 29.1 cent tax on motor fuel and 32.6 cent tax on diesel will make its way to the consumer," the governor tweeted when he signed the bill on March 18. "Though we can't fix everything Washington has broken, we're doing our part to lessen the impact on Georgians' wallets."

The amount of motor fuel tax revenue Georgia collects -- and would forgo during the hiatus -- varies each month. In February, for instance, it totaled $157.4 million.

Also up for reelection is Florida Gov. Ron DeSantis, who last November proposed more than $1 billion in temporary gas tax relief for residents. State lawmakers earlier this month approved a one-month hiatus from the 26.5-cents-a-gallon tax -- lifting it only for October. (DeSantis has yet to receive the bill from the legislature and sign it.)

Democratic governors and lawmakers are also looking to help their residents cope with the spike in gas prices. Connecticut Gov. Ned Lamont, who is running for reelection, on Thursday signed a bill that suspends the state's 25-cents-a-gallon gas tax from April 1 through June 30, as well as eliminates fares on public buses statewide during that period. Suspending the gas tax will cost Connecticut -- which has an estimated surplus of $1.8 billion -- about $90 million in revenue.

"Connecticut is in a stronger fiscal position than ever before, and I am determined to use every tool available to provide relief for our residents," Lamont said in a statement.

Newsom's proposal would send $400 in direct payments per registered vehicle to California drivers -- for up to two vehicles -- and it would come from the state's $45.7 billion surplus, but it would have to be approved by the California legislature. If it agrees, the debit cards could be headed to drivers as early as July. Eligibility would be based on vehicle registration, making it possible for low-income non-tax filers to receive the aid, as well as those who receive Social Security disability benefits, according to the governor's office. (All individual vehicle owners in California -- or those who lease -- will be eligible for the $400-per-vehicle rebate, including those whose cars that run entirely on electricity).

The measure is intended to help consumers deal with the highest gas prices in the nation as California's average price per gallon hovers at $5.90, according to AAA, as well as the sting of California's 51.1-cents-per-gallon gas tax, which is also the highest in the nation, according to the Federation of Tax Administrators.

The debit cards are part of a broader $11 billion package Newsom is proposing that would also provide grants to transit and rail agencies to provide free transit to Californians for three months, covering the costs for some 3 million people who take buses, subways or light rail, the California governor's office said.

Dan Schnur, a professor at the University of California, Berkeley's Institute of Governmental Studies who also teaches at the University of Southern California's Annenberg School of Communication, said the desire from voters to see their leaders act on gas prices is particularly acute because they are reminded of how much it costs each time they pass "big signs on every other street corner."

The rebates "provide a tangible benefit" in an election year, Schnur said, "and Newsom is smart enough to do it in the form of a debit card, which you can see and touch, as opposed to having it get lost in someone's tax returns."

Aid at the grocery store

Virginia Gov. Glenn Youngkin, a Republican, helped set the political agenda on these pocketbook issues last year during his campaign, when he relentlessly focused on his plan to eliminate his state's grocery tax. The connection he established with voters on those kitchen table issues was a key component of his victory against former Democratic Gov. Terry McAuliffe in a state that had been trending blue.

As he called Virginia's General Assembly back for a special session in April to deal with their impasse over the budget, Youngkin went up on the air with a March Madness-themed ad pressing lawmakers to approve his tax proposals, including the elimination of the state's 2.5% grocery tax as an answer to Virginians who feel "it's getting harder to make ends meet." (He also recently proposed suspending Virginia's gas tax for three months, and said the state could use more than $437 million in "unanticipated transportation revenues" to support the gas tax holiday).

Other governors and state lawmakers are also looking to lessen inflation's impact at the supermarket. Prices for meat, poultry, fish and eggs jumped 13% over the 12 months ending in February, according to Labor Department data.

The majority of the 13 states that tax groceries are considering repealing, reducing or temporarily halting the levy, according to the nonpartisan Tax Policy Center.

Tennessee Gov. Bill Lee, a Republican, unveiled a proposal Thursday to suspend state and local grocery sales taxes for 30 days.

"As Americans see their cost-of-living skyrocket amid historic inflation, suspending the grocery tax is the most effective way to provide direct relief to every Tennessean," Lee said in a statement, noting that the state's surplus allows it "to put dollars back in the pockets of hardworking Tennesseans."

In Kansas, where Democratic Gov. Laura Kelly is facing a challenge from Republican Attorney General Derek Schmidt, the steep 6.5% grocery tax has become an issue in the campaign.

Kelly announced her plan to "Axe the Food Tax" back in November. The Republican Governors Association responded with a digital ad campaign highlighting that the governor had campaigned in 2018 on reducing the grocery tax, the nation's second highest, but vetoed a reduction of the tax that the GOP-led legislature approved in 2019.

Meanwhile, the legislature is considering a bill that would trim the grocery tax, though Kelly has continued to push for its full elimination.

Cutting income taxes

A multitude of states are also enacting or considering tax cuts and rebates. They are flush with funds thanks to higher-than-expected revenue from personal and corporate income taxes, as well as sales taxes.

Total state tax revenue collections increased more than 19%, after adjusting for inflation, between April 2021 and January 2022, compared with the same period a year earlier, according to preliminary data collected by the Urban Institute.

Most states are forecasting continued growth in tax revenues for the rest of this fiscal year, as well as the next one.

"States have long-term revenue growth. The projections are favorable in almost every state," said Jared Walczak, vice president of state projects at the right-leaning Tax Foundation. "That can often provide opportunities for long-term tax relief, actual rate reductions or other reforms."

This rosy financial picture has led many governors and legislatures to propose sharing the largesse with their residents -- either through income tax cuts or one-time refunds.

Take Mills in Maine. Earlier this year, she proposed sending half the state budget surplus to roughly 800,000 lower- and middle-income residents in the form of one-time $500 payments, which several Republican lawmakers had called for. Last week, she raised the amount to $850 per person after the state revenue forecast was revised higher by nearly $412 million for the 2022-23 biennium to a total of $1.2 billion.

"Inflation and increased oil and gas prices resulting from Putin's invasion of Ukraine are hitting Maine people hard. This proposal will help Maine people grapple with these increased costs by putting money directly back into their pockets," Mills said in a statement.

Not everyone, however, is a fan of states rushing to cut income taxes -- especially during turbulent times in the economy and on the global stage. Also, federal coronavirus relief funds for states, their residents and their businesses -- which have supported state economies -- have either ended or will run out soon.

The strong revenue growth that states have enjoyed recently is likely temporary, said Lucy Dadayan, senior research associate at the nonpartisan Tax Policy Center. Already, preliminary data for February shows less personal income tax revenue coming in when compared with February 2021, in part because of tax cuts that went into effect last year.

"States are going to end up in a really bad situation," she said.

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