As states project eye-popping budget surpluses, lawmakers are debating how much of that to put toward new spending, how much to set aside in the rainy day fund, and whether to return money back to taxpayers. Thanks to state laws that automatically trigger refunds when a certain level of surplus is achieved, taxpayers in Indiana, Colorado, and Oregon will soon be entitled to major tax refunds under existing automatic refund laws.
Indiana reported a 14% increase in tax collections last year, driven primarily by sales taxes as consumers ramped up spending. After state reserves topped $3.9 billion, taxpayers will see most of last year’s budget surplus returned to their wallets under the Hoosier State’s automatic refund law. The law mandates a tax refund if reserves exceed 12.5% of general fund appropriations; this year, reserves topped 23%.
In 2022, a total refund of $545 million will be divided evenly into estimated payments of $170 per taxpayer – a 62% increase from the last time state revenues triggered a refund in 2012. Even with the refund, Indiana will still have billions in surplus to spend – a nearly $3.4 billion figure that Rep. Greg Porter called an “embarrassment of riches.”
Looking ahead to next year’s session, lawmakers are already discussing a potential reduction to Indiana’s 7% sales tax, which is higher than the rate in any surrounding state. Gov. Eric Holcomb said he is keeping an open mind as the tax cut debate continues.
On the West Coast, for the fourth year in a row, Oregon taxpayers will benefit from a unique provision known as the “kicker” law. When government revenue collections exceed 2% of the initial forecast, the state is constitutionally obligated to refund the full amount of excess revenue. Since Oregon collected nearly $1.9 billion in surplus last year, taxpayers will get 17% of their 2020 income taxes back as a kicker credit – an average refund of $850.
That $1.9 billion kicker is a shocking figure for many Oregon lawmakers, several of whom described an earlier, smaller forecast of a $1.18 billion surplus as “unbelievable” and “stunning.” This year’s kicker smashes the previous record of $1.6 billion that was paid out to taxpayers last year.
But revenue continues to beat expectations in Oregon. Economists are already projecting another $558 million kicker in 2024, halfway through the next two-year budget.
In Colorado, a constitutional provision, one viewed by many as the gold standard of state spending limits, will provide a temporary tax cut in addition to $454 million in tax rebates. Known as the Taxpayers Bill of Rights (TABOR), the 1992 amendment created an annual spending limit tied to population growth and inflation. That allowable revenue growth was 3.1% in FY 2020-21, when Colorado collected 8.2% more in revenue subject to TABOR than the previous year. As such, residents will enjoy an average sales tax refund of $69 for individual filers and $166 for those who filed jointly – the largest refund in 20 years.
Colorado voters already approved an income tax cut last November by a 56–43% margin. Initiative 16 permanently cut the state income tax from 4.63% to 4.55%. But TABOR provisions will temporarily lower the rate even further, to 4.50% over the course of 2021.
While the TABOR tax cut is temporary, the stage is set for the possibility of more permanent tax cuts in the future. Democratic Gov. Jared Polis, who has praised the TABOR tax relief, recently proposed bringing the state income tax to zero. Meanwhile, after the resounding success of Initiative 16 in 2020, another income tax cutting ballot measure has now garnered more than enough signatures to appear on next year’s ballot as Initiative 31. If voters approve, Initiative 31 would permanently lower the income tax rate from 4.55% to 4.40%.
Thanks to automatic tax refund laws, taxpayers in these three states – Indiana, Oregon, and Colorado – will enjoy greater financial security in the coming year. Given rising prices for basic goods and services, state taxpayer refunds will provide relief to households at a time when it is greatly needed. It’s nice that existing law is automatically triggering such refunds in IN, CO, and OR. Lawmakers and governors elsewhere would do well to follow suit.