More than a dozen states have proposed a new strategy to cut income taxes for their residents.
Some states recently adopted a decrease in their income tax rates. Idaho was one of these states. The governor signed into law in February a cut that will help residents save anywhere from hundreds to thousands per year depending on their earnings. The details of the tax cuts are still being worked out by other state legislators.
According to a December analysis by the Urban Institute, tax revenue from local and state governments jumped 42% across the country in the second quarter 2021, compared to the same period one year ago. The economic recovery following the pandemic has helped boost taxes, with corporate taxes rising. The economic recovery from the pandemic has helped to increase income taxes as workers have been able to regain their jobs. Consumers are spending more which in turn helps to boost sales tax revenue.
Governors and legislators in the states want to return some of this windfall to residents at a time when inflation makes it more expensive to buy everything, from groceries up to gasoline. There’s another reason states are pushing for lower taxes. Some lawmakers believe that it will make their areas more appealing to white-collar workers, who are looking to move to the area due to the shift to remote work.
Katherine Loughead, senior policy analyst at Tax Foundation, said that inflation has been a major topic of discussion this year and she believes that is why there has been bipartisan interest in tax relief.
She said, “We are seeing a lot greater states talking about phasing in individual income taxes — they’re seeing how no-income states are gathering lots of residents,” like Florida and Texas.
For instance, some lawmakers and policy experts in Georgia and Wisconsin have suggested the elimination of all income taxes. There are currently nine states that do not tax wages. These include New Hampshire and Florida.
While Republicans tend to lead states that seek to reduce income taxes, more Republican-led states are pursuing proposals to lower taxes via lower grocery or gasoline tariffs. In March, the rise in fuel prices led to both the Republican governor in Georgia and the Democratic governor in California calling for relief from state gasoline taxes.
Are tax cuts likely to increase inflation?
As states consider reducing taxes, there are many questions. Lower tax rates will increase consumers’ income, but it could also lower state revenue. This could make it difficult for states to keep their coffers full.
It could also increase inflation if consumers spend more money. This would cause an increase in demand for goods, even though the supply chain is already tight, said Howard Gleckman, of the Urban Institute’s Tax Policy Center.
Gleckman stated that lowering taxes would “drive up prices and worsen inflation that governors claim they are so concerned about,” in a March 15 post. “And it’ll increase pressure on Federal Reserve to raise interest rate even more than it had planned.”
Here are the states that have proposed or approved recent cuts in their income taxes rates for 2022.
Colorado
An bill sponsored by Republicans would lower the state’s income tax rate from 4.55% to 4.4%.
An non-partisan analysis the proposal found that it would have minimal or no effect on low-income taxpayers without tax liabilities. The average tax reduction would be $100 annually, but the greatest benefits would go to taxpayers with higher incomes. A household earning over $200,000 per year would be able to save $600 on taxes.
Georgia
Georgia’s House approved a bill to create a flat income tax in Georgia with a rate of 5.25%, increase the income exempted from taxation, and eliminate many deductions. Georgia’s highest income tax rate of 5.75% is currently in effect. This applies to income above $7,000 earned by one person, income over $10,000 by a married couple, or income earned by one person with dependents.
According to a study by Georgia Budget & Policy Institute using modeling from the Institute on Taxation and Economic Policy, 62% of flat-rate benefits would flow directly to the top 20% tax filers in Georgia.
Two Republicans propose to abolish the state’s income tax. This is the source of roughly half the nearly $30 billion in state revenues for Georgia. One Republican legislator stated that he would eliminate the tax as “taxation theft”.
Idaho
In February, Idaho’s Republican governor Brad Little signed a bill that represents the largest tax cut in the state, according to the Idaho Capital Sun.
The new law reduces the state’s five tax brackets down to four and lowers the income tax rate for the wealthiest bracket to 6%, from 6.5%. This effort will reward Idahoans who are the most wealthy, according to the Idaho Center for Fiscal Policy.
Taxes will be reduced by $13,000 for households earning over $557,000 or the top 1 percent of the state. For middle-class households with incomes between $44,000 and $71,000, there will be a $300 savings per year.
The law also provides $350 million in tax rebates. These will apply to 12% of an individual’s 2020 Idaho income tax return or $75 for each taxpayer or dependent.
Little stated when he signed his bill that “I remember my mom telling me that you can’t have all your cake and eat all of it, but this year we kinda are.”
Indiana
In March, state lawmakers approved a $1.1 million tax cut package. According to the Indianapolis Star, the bill reduces the individual income tax rate from 3.23% to 2.9%. This would save an Indiana resident who earns about $30,000 per year about $100.
Star stated that the bill eliminates 1.4% utility tax, which will help homeowners save approximately $4 to $5 per month.
Iowa
The Iowa governor signed a billto implement a flat tax of 3.9% by 2026 instead of the current graduated rates of 8.5%.
The bill also repeals the state tax on retirement income, effective 2023. This will apply to IRA distributions as well as taxable pensions.
Michigan
Michigan lawmakers recently agreed to reduce the state’s income taxes and provide tax credits for retired people , according to the Detroit Free Press.
The plan would lower the personal income tax rate from 4.25% to 3.9% and double the retirement tax deductions, to $40,000 for individuals and $80,000 to couples for people born after 1946.
Its fate is uncertain as Gov. Gretchen Whitmer (Democrat) has called the plan “fiscally reckless,” according to the Detroit News .
Mississippi
Mississippi lawmakers are looking to lower income taxes. They propose to eliminate one bracket that currently imposes a 4% tax for earnings between $5,000 and $10,000. According to to Clarion Ledger, the bill would also lower the grocery sales tax to 5% from the current 7% starting July.
Other lawmakers in the state are keen to abolish the income tax altogether, with the goal of attracting more people to the state as well as boosting the economy. The Commercial Appeal reports. Others are against the tax cuts because they believe Mississippi cannot afford the difficult cuts to its government services.
“We don’t pay state employees. Our roads are falling apart.” Mississippi Today has learned that state Senator Hob Bryan, a Democrat from Mississippi, has not funded schools. “We don’t have water or sewer. You can reduce taxes but not have a functioning community. This is the direction we are headed right now.
Missouri
Missouri Gov. Mike Parson (a Republican) is proposing lowering the state’s income taxes to 5.3% from 5.4%. Lincoln Hough, Republican state senator, proposes a tax cut of 4.8%.
According to the Missouri Times, Hough stated that Missouri should return the people’s funds. “It’s their money, and they should be able to choose what’s best for them and their families.”
Nebraska
Last month, Nebraska legislators approved tax cuts for personal and corporate income that were backed by Republican Gov. Pete Ricketts approved the cuts despite reservations over who would be most benefit and what revenue loss the state might experience.
Nebraska’s proposal would reduce the top individual income tax rate from 6.84% to 5.84% in January 2025. The top corporate income tax rate will drop to 5.84%, from 7.5%.
New York
Gov. Kathy Hochul proposes tax relief for New Yorkers via a $1 billion property rebate program.
The Democrat wants to accelerate income tax cuts, and not delay them until 2025. She would, for example, push for a rate cut to 5.5% on households with incomes between $81,000 and $215,000 – a reduction from the current rate at 6.33%.
According to to Bloomberg News, the average property tax rebate benefit would be $970 for homeowners living outside New York City.
Oklahoma
Gov. Republican Kevin Stitt proposed a taxpayer protection plan in February that would lower income taxes on the basis of state revenue. He also demanded the exclusion of military benefits from state income tax and the elimination of the state grocery sales tax.
These cuts would be made after the state reduced its tax rates on January 1st, with individual income tax rates reducing by 0.25 percent.
South Carolina
Governor Henry McMaster, a Republican, proposed lowering the tax rates for residents in February. Republican Henry McMaster proposed immediately lowering tax rates for residents. He reduced the rates for the current brackets of 4%, 5.5%, and 6% to 3%, and cut the current bracket of 7% to 6.5%.
According to WLTX, lawmakers are currently working out the proposal. There may be some modifications. One plan would reduce the 7% bracket to 5.7%. WLTX stated that a person with a salary of about $58,000 can save $400 to $560 per year by choosing from the different proposals.
WLTX reported that residents who file 2021 tax returns in the state will be eligible for a one-time rebate between $100 and $700 per year.
Utah
Utah lawmakers approved an income tax cut in February. It reduces Utah’s tax rate from 4.95% to 4.85%. An average $129 per taxpayer would be saved in income taxes for more than 1,000,000 taxpayers.
