As a boom in tax revenue begins to falter, politicians in Southwest states are looking at additional measures during their upcoming legislative sessions to lower taxes.

The moves come amid a dimming economic outlook, still-elevated inflation, and the impact of previous tax cuts.

Nationwide, state tax collections were up 1.1% in October, but fell on an inflation-adjusted basis for a third consecutive month year over year, according to the Urban Institute, which tracks state tax revenue. Lucy Dadayan, the institute’s senior research associate, said revenue is weakening due in part to tax rate cuts, rebates, and tax-free holidays.

“Persistently high inflation, volatility in the financial markets, rising interest rates, and weakening home prices are all likely to lead to a continuing slowdown in economic activity, which in turn will lead to further weakness in state tax revenue collections,” she said in her latest report. 

S&P Global Ratings, which is forecasting a shallow recession for the first half of 2023, noted that while state revenues continue to meet or slightly outpace budgetary expectations, they are not necessarily keeping up with inflation. 

“Should inflation remain elevated, this could add pressure on budgets even where revenues remain on target,” the rating agency said in a recent report.

The Consumer Price Index report for November said prices had increased 7.1% percent over a 12-month period.

“Noteworthy” tax changes took effect Jan. 1 in 38 states, according to the Tax Foundation.

“Most of these changes represent net tax reductions, the result of an unprecedented wave of rate reductions and other tax cuts in the past two years as states respond to burgeoning revenues, greater tax competition in an era of enhanced mobility, and the impact of high inflation on residents,” the foundation said.

Arizona was among three states switching to a flat individual income tax rate from a graduated rate structure, while five states, including Arkansas, reduced corporate income tax rates. 

In Texas, general revenue fund tax growth continues to outpace inflation.

Between the September start of fiscal 2023 through December, the state collected $23 billion, up 15.5% over the same period in fiscal 2022. Sales taxes, the biggest revenue source in a state that doesn’t levy an income tax, hit an all-time monthly high of $3.96 billion in November.

State Comptroller Glenn Hegar released a revised revenue estimate in July that more than doubled the projected budget balance at the end of fiscal 2023 to nearly $27 billion from $12 billion. General revenue-related funds for the fiscal 2022-23 biennium were increased 10.2% over a November 2021 estimate to about $149 billion. The state’s rainy day fund is projected to have a $13.66 billion balance at biennium end after accounting for appropriations and investment and interest earnings.

Texas lawmakers, who return to session this week after an off year in 2022, are eyeing the big pot of money for property tax relief.

During his successful reelection campaign Republican Gov. Greg Abbott called for using at least half of the $27 billion surplus to reduce property taxes.

Lt. Gov. Dan Patrick, who was also reelected, has raised concerns that doing so would bust the state’s constitutional spending cap for the next biennial budget. 

The conservative Texas Public Policy Foundation, which has been pushing for the largest property tax cut in the state’s history, said it could be accomplished under the cap if the legislature spends less. 

“There’s nothing preventing policymakers from spending much, much less than what the limit provides,” James Quintero, the group’s policy director, wrote in a report last month. “And if they do so, they’ll be in a good position to deliver massive tax relief.”

In November, Patrick, who heads the Texas Senate, put “a robust property tax cut for everyone” at the top of his list of legislative priorities, saying there may be creative ways to do it without impinging on the spending cap. His plan includes another increase in the homestead exemption and a large personal property tax exemption for businesses. 

“When you have this kind of money you have to give it back to the taxpayers,” he told reporters.

Patrick cautioned that the state still needs a solid reserve because “you don’t know what’s ahead,” and said he was looking for lawmakers to pass a bill increasing the amount of money allowed to flow into the state’s rainy day fund.

Reelected Colorado Gov. Jared Polis, a Democrat, on Tuesday proposed tapping $200 million from the general fund for immediate property tax relief to ease heftier tax bills resulting from a projected 26.5% increase in residential assessed values.

“Gov. Polis is committed to working with the legislature to pass a long-term tax relief package that reduces commercial property taxes and creates a long-term mechanism to protect homeowners from being priced out of their homes,” a statement from his office said.

Colorado’s quarterly economic forecast released Dec. 20 raised fiscal 2023 general fund revenue by $412.4 million over projections made in September. The increase, fueled by income tax returns, will more than offset a proposition approved by state voters in November reducing the tax rate to 4.4% from 4.55%, according to the governor. 

General fund tax collections totaling $6.87 billion from July through November were 6.7% below the latest forecast, which projected a 2.1% revenue decline in fiscal 2024.

Kansas Gov. Laura Kelly, who won a second term in November, is pushing for a three-part “Axing Your Taxes” plan totaling more than $500 million over the next three years. The Democratic governor, who faces a GOP-dominated legislature, wants to immediately eliminate the sales tax on groceries that is being phased out, create an annual state sales tax holiday for school supplies, and increase the earnings threshold for taxing retiree social security payments. 

“At a time when prices are on the rise, no family should still be paying state sales taxes on basic necessities like groceries and diapers,” Kelly said in a statement. “This plan creates real savings for all Kansans, including those who need it most.”

Individual income and sales taxes in Kansas slipped below estimates in December, but total tax collections of $4.58 billion for the first six months of fiscal 2023 were 2.3% over estimate and 8.9% higher than the same period in fiscal 2022. 

Utah’s Republican Gov. Spencer Cox unveiled a plan for $1 billion in tax reductions in December that included reducing the income tax rate to 4.75% from 4.85%, rebating $400 million to tax filers, and reducing the property tax levy rate for a one-time savings of $127 million.

The plan, which Cox described as meaningful, deep, and sustainable, would add to $300 million in tax cuts signed into law over the past two years. 

“Tax cuts have to be considered with fiscal prudence so we don’t create structural problems for future generations and state leaders,” he said.

The state estimated total state-generated revenue at nearly $14 billion in fiscal 2024, up from $13.38 billion in fiscal 2022, which ended June 30 with a combined general fund and income tax fund budget surplus of $1.46 billion.