Lawmakers in almost every state (44 according to the Center on Budget and Policy Priorities) must close significant budget gaps again this year. Despite these continuing fiscal woes, a variety of costly tax cuts -- from reductions in corporate tax rates to new capital gains breaks -- have been proposed alongside massive spending cuts in many of these states.
But West Virginia and Arkansas are among the six states not reporting budget gaps this year -- a fact which has provided them with somewhat more flexibility to consider reducing taxes. In this context, both Arkansas and West Virginia lawmakers recently enacted reductions in their states' sales taxes on groceries. As of July 1, 2011, Arkansas’ sales tax rate on groceries will be lowered from 2 percent to 1.5 percent. West Virginia’s rate will drop from 3 percent to 2 percent starting January 1, 2012. These cuts were championed by Governors Beebe and Tomblin as a means to provide immediate assistance to taxpayers (in particular low-income households), and as a way to stimulate their states' economies.
But reducing the sales tax on groceries is not the most targeted approach available to state lawmakers looking to support working families. The poorest 40 percent of taxpayers only receive about 25 percent of the benefit from exempting groceries in most cases. The rest goes to wealthier taxpayers who can more easily afford to pay the sales tax on groceries. Increasing Arkansas’s refundable state Earned Income Tax Credit (EITC) or enacting a state EITC in West Virginia would have been a better targeted alternative for ensuring that the tax cuts would reach low- and middle-income working families. However, when viewed alongside the sharply regressive and completely unaffordable tax cuts being considered in so many other states, Arkansas and West Virginia lawmakers should receive some credit for at least enacting progressive tax cuts that benefit low- and moderate-income households the most as a share of their incomes.