At a time when the cost of everything from gas to Netflix is rising, there’s a good chance that one of your expenses will decline: your state tax bill.
Awash in budget surpluses, lawmakers are cutting taxes on everything from income to groceries, and the trend isn’t limited to red states. Several Democratic governors, including New York Gov. Kathy Hochul and Illinois Gov. J.B. Pritzker, have supported broad tax cuts for state residents. “If your state isn’t cutting taxes this year, it’s in the minority,” says Katherine Loughead, senior policy analyst for the Tax Foundation, a tax research organization.
Some of the tax cuts are temporary, while others could permanently lower residents’ tax bills. For example, Mississippi enacted legislation that will lower the state’s top income tax rate from 5% to 4% by 2026, and Gov. Tate Reeves has indicated he’d like to eventually phase out the tax altogether. In April, Georgia Gov. Brian Kemp signed legislation that will consolidate the state’s six income tax brackets into a flat rate of 4.99% as soon as 2029. The Peach State’s highest income bracket is currently 5.75%. Iowa is lowering its top tax rate of 8.53% to a flat rate of 3.9% by 2026. “They’re going from one of the highest income tax rates to a fairly competitive rate,” Loughead says.
Other targets of state tax cutters:
Real estate. Home values have soared in recent years, and while that may seem like a nice problem for homeowners to have, it can also mean a big jump in property tax bills. In New Jersey, which has the highest property taxes in the U.S., Gov. Phil Murphy has proposed providing property tax rebates of up to $700 per homeowner. The tax relief package enacted in Illinois includes a property tax rebate of up to $300 per homeowner (Illinois has the second-highest median property tax rate in the U.S.).
Retirement income. New Mexico lawmakers recently voted to exclude Social Security from state taxes for most residents, while Utah lawmakers expanded eligibility for a tax credit that offsets a portion of taxes on Social Security benefits. Starting in 2023, Alabama residents who are 65 or older will be allowed to exempt from state taxes up to $6,000 in withdrawals from IRAs and other retirement plans.
Groceries and gas. In an effort to lessen the pain at the pump, a number of states have temporarily reduced or eliminated gas taxes. Now, they’re looking to provide relief at the grocery store, too. Kansas is phasing out its tax on groceries, while Oklahoma Gov. Kevin Stitt has called for doing the same in his state. Illinois and Tennessee are suspending their grocery taxes temporarily.
Past taxes. Some state lawmakers don’t want to wait until next year’s tax-filing season to provide relief to their residents. Earlier this year, Idaho Gov. Brad Little signed legislation that will provide a rebate of $75 per full-time resident and each dependent, or 12% of their 2020 tax liability, whichever is greater. New Mexico lawmakers enacted legislation that will provide residents with a rebate of $500, or $1,000 for married couples that file jointly. Other states will be sending resident rebate checks this year, too (or are considering it).
Some tax analysts warn that broad tax cuts could backfire if tax revenue slows. The jump in states’ tax revenue between 2020 and 2021 reflected “a federal policy response to a once-in-a-century crisis that jump-started the economy,” says Richard Auxier, senior policy associate at the Urban-Brookings Tax Policy Center, a tax research nonprofit. While tax revenue remained strong during the first half of 2022, states are forecasting that growth will slow in the second half of fiscal 2022 and weaken significantly in fiscal 2023, according to Lucy Dadayan, senior research associate for the Tax Policy Center. “The current global geopolitical crisis, continued uncertainties related to the ongoing pandemic, high inflation and evolving federal monetary policy could all muddle the revenue outlook for the states,” Dadayan wrote in a blog post.
With that in mind, sending state taxpayers rebate checks is a more prudent way to deal with budget surpluses than permanently cutting tax rates, Auxier says. “If a state pushes out rebate checks this year and things don’t look so great next year, they haven’t done any damage,” he says.
Some states have tied tax rate reductions to revenue growth. Georgia’s tax cuts, for example, are contingent on meeting revenue projections. Similarly, legislation enacted in Kentucky, which will reduce the state’s flat tax to 4.5% from 5% in 2023, imposes annual rate reductions of 0.5%, but only if the state’s cash reserves hold up and revenue exceeds spending. If those goals are met, Republican lawmakers hope to phase out the state’s income tax entirely. They say the tax cuts are needed to make Kentucky more competitive in attracting new residents with neighboring Tennessee, which has no income tax.
Other states also feel compelled to make themselves more attractive to a workforce that has become increasingly mobile in the wake of the pandemic, Loughead says. More workers having the option of working remotely is “one of the driving factors behind states’ desire to cut income tax rates and even phase out income taxes,” she says. “People are really attracted to low- and no-income-tax states.”
— to www.kiplinger.com