SOME STATES IN AMERICA HAVE ALREADY REDUCED OR PLAN TO REDUCED TAXES FOR RESIDENTS

The pandemic was expected to cut states' tax revenues as millions of people lost their jobs, but two years after the crisis began, many states found themselves full of cash instead. This prompted more than a dozen states to propose a new strategy: income tax cuts for residents.

Some states have recently cut income tax rates, such as Idaho, where in February the governor signed into law a cut that would save residents hundreds to thousands of dollars a year, depending on their income.

Nationwide, state tax revenue rose 42% in the second quarter of 2021 compared to the same period a year earlier, according to a December analysis by the Urban Institute. Taxes are bolstered by economic recovery from the pandemic. Jobs were reopened, which helped raise the income tax. And consumers began to spend more money, thereby helping to increase tax revenue.

Governors and state legislators say they want to give back some of that windfall to residents, especially at a time when everything from groceries to gasoline is getting more expensive due to inflation. But there's another reason states are pushing for tax cuts: Some lawmakers think it will make their regions more attractive to high-paid so-called white-collar workers who are looking to move amid the shift to telecommuting.

"Inflation has definitely been a big part of the discussion this year, and I think that's why we're seeing bipartisan interest in tax credits," said Katherine Lochhead, senior policy analyst at the Tax Fund.

She added, "We're seeing a lot more states talking about phasing out personal income taxes - they're seeing states with no income tax picking up a lot of residents," like Florida and Texas.

For example, some policy experts and legislators in Georgia and Wisconsin have put forward the idea of completely abolishing income taxes in their states. There are currently nine states, from Florida to New Hampshire, that do not tax wages.

States considering income tax cuts tend to be led Republicans, but more widespread proposals to cut taxes through food or gasoline appear in states led by both Republicans and Democrats. For example, both the Republican governor of Georgia and the Democratic governor of California called for the repeal of gasoline taxes in March because of the spike in fuel prices.

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Will tax cuts increase inflation?

There are many questions states face when they propose tax cuts. Lower tax rates will give consumers more money in their pockets, but it will lower the state's revenue, which can be risky.

And that will drive up inflation if consumers push demand for goods at a time when the supply chain is already tight, warned Howard Gleckman of the Urban Institute's Tax Policy Center.

Tax cuts “would raise prices and exacerbate inflation,” Gleckman wrote in a March 15 blog post. “This will increase the pressure on the Federal Reserve, and it will have to raise interest rates even more than planned.”

Which states are proposing or have recently approved income tax cuts in 2022: Colorado

The Republican-backed bill would cut the state income tax rate to 4.4% from 4.55%.

An unbiased analysis of the proposal showed that it would have little or no effect on low-income taxpayers who have no tax liability. While the average tax cut will be $100 a year, taxpayers with higher incomes will benefit the most. For example, families earning more than $200,000 a year will save about $600 in taxes.

Georgia

The Georgia House of Representatives recently approved a bill that would create a 5.25% flat state income tax, increase tax-free income, and eliminate many deductions. The maximum income tax rate in Georgia is currently 5.75% and applies to income over $7,000 earned by a single person, or income over $10,000, received by a married couple or a person with dependents.

Some lawmakers want the state to cut taxes even further, and two Republicans are proposing to completely eliminate the income tax, which currently provides about half of US Georgia's nearly $30 billion in income. One GOP legislator said he wants to abolish the tax because "taxation is theft."

Idaho

Republican Idaho Gov. Brad Little signed a bill in February that represents the largest tax cut in the state.

The new law reduces the state's five tax brackets to four and cuts the income tax rate for the wealthiest tax brackets to 6% from 6.5%.

Families earning more than $557,000, or the top 1% in the state, will have their taxes cut by more than $13,000 a year. By comparison, middle-class families earning $44,000 to $71,000 would save less than $300 a year.

The law also provides a $350 million tax credit that will apply to 12% of the 2020 Idaho income tax return, or $75 for each taxpayer and dependent, whichever is greater.

Indiana

In March, state legislators passed a $1.1 billion tax cut package. The bill cuts the personal income tax rate from 3.23% to 2.9%, saving about $100 a year to an Indiana resident who earns about $30,000 a year.

The bill would, among other things, eliminate the 1.4% utility tax, which would save homeowners about $4-$5 a month.

Lowa

On March 1, the Governor of Iowa signed a bill to introduce a flat tax rate of 3.9% in 2026 instead of current progressive tax rates, which reach 8.5%.

The bill also eliminates the family's retirement income tax from 2023, which would apply to IRAs, taxable pensions and annuities.

Michigan

Lawmakers in Michigan recently reached an agreement to cut the state income tax rate and create new tax breaks for retirees.

The plan would cut the income tax rate from 4.25% to 3.9% and double the pension tax credits to $40,000 for individuals and $80,000 for couples born after 1945.

But its fate is in doubt as Gov. Gretchen Whitmer, a Democrat, called the plan "financially irresponsible."

Mississippi

Mississippi lawmakers are proposing to reduce income tax by phasing out one tax bracket, which currently has a 4 percent tax on income between $5,000 and $10,000. According to the Clarion Ledger, the bill will also cut the sales tax on groceries to 5% from 7% starting in July.

But other lawmakers in the state want to abolish the income tax entirely — with the idea of bringing more people to the state and jumpstarting the economy. Others oppose the tax cut, believing that Mississippi cannot afford the drastic reduction in services it will cause.

“We don't pay civil servants, our roads are crumbling. We don't fund schools,” State Senator Hob Brian said. We don't have water or sewerage. We can cut taxes and not have a functioning society. That's where we're heading now."

Missouri

Missouri Gov. Mike Parson is proposing to cut the state income tax rate to 5.3% from 5.4%. Some lawmakers want to cut taxes even further, with Republican Senator Lincoln Hough suggesting a cut to 4.8%.

“Missouri needs to give back the money to the people,” Hough said. "It's their money and they have to decide what's best for themselves and their families."

Nebraska

Nebraska lawmakers last month approved income tax cuts for individuals and current progressive tax rates, which reach 8.5%.

The bill also eliminates the family's retirement income tax from 2023, which would apply to IRAs, taxable pensions and annuities.

NY

Governor Kathy Hokul is offering tax breaks to New Yorkers through a $1 billion property tax refund program.

The governor wants to accelerate the planned income tax cut through 2023 instead of 2025. For example, it will promote a rate cut to 5.5% for families earning between $81,000 and $215,000, down from the current rate of 6.33%.

The average benefit from a property tax rebate will be about $970 for homeowners outside of New York City.

Oklahoma

Republican Gov. Kevin Stitt proposed a "taxpayer protection plan" in February that would cut income taxes based on state revenue. He also called for the exemption of military benefits from the state income tax and the elimination of the state sales tax on products.

These cuts come after the state cut its tax rates on January 1 last year.

South Carolina

In February, Republican Governor Henry McMaster proposed an immediate reduction in tax rates for residents, cutting them for the current 4%, 5% and 6% tax brackets to 3% and cutting the current 7% cap to 6.5%.

The proposal is currently being considered by lawmakers, with some possible changes. According to various suggestions, a person who earns about $58,000 can save between $400 and $560 a year.

Residents who file their 2021 tax returns in the state will also receive a one-time $100 to $700 rebate by the end of the year.

Utah

Utah lawmakers approved an income tax cut in February that reduces the state's rate to 4.85% from 4.95%. More than 1 million taxpayers will save an average of $129 each in income tax.

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She added, "We're seeing a lot more states talking about phasing out personal income taxes - they're seeing states with no income tax picking up a lot of residents," like Florida and Texas.

‍

Will tax cuts increase inflation?

There are many questions states face when they propose tax cuts. Lower tax rates will give consumers more money in their pockets, but it will lower the state's revenue, which can be risky.

And that will drive up inflation if consumers push demand for goods at a time when the supply chain is already tight, warned Howard Gleckman of the Urban Institute's Tax Policy Center.

Which states are proposing or have recently approved income tax cuts in 2022: Colorado

The Republican-backed bill would cut the state income tax rate to 4.4% from 4.55%.

Georgia

Idaho

Republican Idaho Gov. Brad Little signed a bill in February that represents the largest tax cut in the state.

The new law reduces the state's five tax brackets to four and cuts the income tax rate for the wealthiest tax brackets to 6% from 6.5%.

The law also provides a $350 million tax credit that will apply to 12% of the 2020 Idaho income tax return, or $75 for each taxpayer and dependent, whichever is greater.

Indiana

The bill would, among other things, eliminate the 1.4% utility tax, which would save homeowners about $4-$5 a month.

Lowa

On March 1, the Governor of Iowa signed a bill to introduce a flat tax rate of 3.9% in 2026 instead of current progressive tax rates, which reach 8.5%.

The bill also eliminates the family's retirement income tax from 2023, which would apply to IRAs, taxable pensions and annuities.

Michigan

Lawmakers in Michigan recently reached an agreement to cut the state income tax rate and create new tax breaks for retirees.

The plan would cut the income tax rate from 4.25% to 3.9% and double the pension tax credits to $40,000 for individuals and $80,000 for couples born after 1945.

But its fate is in doubt as Gov. Gretchen Whitmer, a Democrat, called the plan "financially irresponsible."

Mississippi

Missouri

“Missouri needs to give back the money to the people,” Hough said. "It's their money and they have to decide what's best for themselves and their families."

Nebraska

Nebraska lawmakers last month approved income tax cuts for individuals and current progressive tax rates, which reach 8.5%.

The bill also eliminates the family's retirement income tax from 2023, which would apply to IRAs, taxable pensions and annuities.

NY

Governor Kathy Hokul is offering tax breaks to New Yorkers through a $1 billion property tax refund program.

The average benefit from a property tax rebate will be about $970 for homeowners outside of New York City.

Oklahoma

These cuts come after the state cut its tax rates on January 1 last year.

South Carolina

The proposal is currently being considered by lawmakers, with some possible changes. According to various suggestions, a person who earns about $58,000 can save between $400 and $560 a year.

Residents who file their 2021 tax returns in the state will also receive a one-time $100 to $700 rebate by the end of the year.

Utah

Utah lawmakers approved an income tax cut in February that reduces the state's rate to 4.85% from 4.95%. More than 1 million taxpayers will save an average of $129 each in income tax.

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