War of the States

In 2009, facing a revenue drop-off from the previous year’s recession, states raised taxes collectively by $29 billion—at the time, the largest annual hike in history. Many of the biggest increases occurred in Democratic-leaning states, including New York, New Jersey, and Connecticut, which targeted businesses and upper-income residents especially, even as newly inaugurated president Barack Obama touted a similar agenda in Washington. What seemed like a new taxing trend dissipated, however, after the 2010 midterms, when Republicans captured seven governorships and full control of 23 state governments, up from just ten before Obama’s election. The newly elected governments quickly began cutting taxes and reducing business regulations, setting off an intense, often acerbic, state competition to attract wealthier residents and employers. This battle transformed the American economic map, right up to the Covid-19 pandemic.

Now, with another pro-tax Democrat, Joe Biden, in the White House and a lockdown-induced recession in the rearview mirror, another clash among the states is breaking out. Several Democratic strongholds, claiming fiscal stress and the need for “equity” in taxation, have initiated big increases on individuals and firms. Meantime, a group of largely Republican-leaning states have cut levies. The rise of remote work and the vastly different Covid strategies that states have adopted have added unique elements to this conflict. The Biden administration has also joined the fray. Having learned from the Obama years how effective the GOP strategy can be, Biden is trying to blunt some Republican state economic policies through federal mandates. But only a year after Biden’s victory, Republicans have already won the governorship and legislative control of one solidly Democratic state—Virginia. The battle over states’ futures will intensify in the run-up to November’s elections, with 36 governorships and more than 6,000 state legislative seats in play.

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