Forty-three states adopted tax relief in either 2021 or 2022, often in both years, and of those, 21 lowered state income tax rates. It’s been a remarkable trend, fueled by strong state revenues and an increasingly competitive tax environment. But many observers doubted that the trend could, or should, continue until 2023.
May. Should. Going to.
Lawmakers in more than a dozen states are seriously considering individual income tax cuts in 2023. In many states, these proposals would accelerate or build on rate reductions adopted in the last two years. But not all. Four newcomers could join the fold: Kansas, North Dakota, Virginia, and West Virginia, which could lead to half of the states (and 25 of the 43 that taxed some form of income) reducing income tax rates. individual income in three years.
After adjusting for inflation, state tax collections were 9.3 percent higher in 2022 than in 2017, despite the fact that 17 states had lower top income tax rates in 2022 than in 2017, not to mention lower income tax rates. cuts in corporate income taxes and other state taxes. taxes. (Four had higher individual income tax top rates in 2017.) The median state’s top individual income tax rate decreased from 5.5% in 2017 to 5.0% in 2022, while tax collection, in real terms, increased by 9.3%.
These are state tax collections, not state revenue. Federal assistance to state governments during the pandemic is not included in the count. Indirectly, however, the unique circumstances of the pandemic boosted state tax revenues, both because consumer behavior changed, sometimes, but not always, temporarily, and because federal assistance to businesses and individuals increased their taxable activity. States have correctly recognized that some of their own-source revenue gains were temporary and have exercised great prudence in assessing how much of that growth is sustainable and available for tax relief.
But it is a mistake to assume, as some do, that the higher tax take was only a temporary blip from the pandemic. They were rising long before the pandemic, and experts tend to agree that states have a higher revenue baseline than six years ago. The Tax Cuts and Jobs Act (TCJA) expanded tax bases (which flowed through state tax codes) and increased domestic investment. The broad economic changes of recent years have generally resulted in higher taxation. And unfortunately and unfairly, inflation has increased taxation in real terms, not just nominal ones.
In other words, most states can afford to provide tax relief. And in an increasingly mobile environment, where people have more flexibility than ever in choosing where to live and work, some can hardly afford not to.
And while no one knows if a recession is coming, we do know that states’ basic incomes are higher than they used to be. Also, states that have given up tax cuts are not sitting on their reservations. They have simply chosen to invest their revenue growth in new (often recurring) spending programs rather than return a portion to taxpayers.
In all, the 12 states known to be considering income tax cuts this year, including eight that have already adopted reductions, anticipate next fiscal year tax revenue to be 9.1 percent higher (adjusted for inflation) than pre-pandemic collections. Some, like Utah (32.3 percent), Idaho (24.2 percent) and Arkansas (18.7 percent), are looking for particularly dramatic gains. And if anything, fiscal year 2025 could be better. Some of these states have yet to release their fiscal year 2025 forecasts, but among those that do, the anticipated growth in real tax revenue since before the pandemic is 11 percent.
Meanwhile, state emergency funds have never been better supplied, and many states have large surpluses. Idaho, for example, is planning a current year surplus equivalent to 40 percent of your annual tax take before the pandemic.
It’s no surprise that income tax relief is on the table in Arkansas, Georgia, Idaho, Indiana, Kansas, Kentucky, North Dakota, Oklahoma, Utah, Virginia, West Virginia, Wisconsin, and potentially elsewhere.
And even more surprising that in a different set of states, the tax conversation is about creating new and higher taxes on wealth, investment and entrepreneurship – tax proposals that seem unrelated to actual or perceived income needs. , and which tend not to even be connected to new spending proposals. Increasingly, states are offering taxpayers and businesses a choice between jurisdictions that see increased revenue as a reason to cut taxes and double their competitive advantage, and those that instead focus on raising taxes. regardless of need and with indifference to economic costs. .
After two years of tax reform and tax relief, 2023 appears to be setting states on divergent paths. Their respective elections are likely to only accelerate migration and further economic growth for those states that are choosing a more competitive tax environment.
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