There’s a lot of good news about state income taxes. State budgets held up much better than expected during the pandemic, and many have been passing along benefits to taxpayers.
Since 2021, 27 states have enacted or implemented reductions to their individual income tax, corporate income tax or state sales tax rates, Katherine Loughead, senior policy analyst with the Tax Foundation, says. “Even in the states that have not enacted rate reductions, the vast majority of states have enacted other forms of tax relief,” she says.
Some states sent rebate checks to taxpayers, expanded refundable tax credits for low-income residents or eliminated sales taxes on groceries and other items.
“I think what’s interesting is that every state had this opportunity and different states went in different directions,” Richard Auxier, senior policy associate for the Tax Policy Center, says.
States’ Tax Revenues Remained Strong During COVID-19
States’ tax revenues withstood the COVID-19 pandemic better than expected in part because even though some people lost their jobs many higher- and middle-income taxpayers continued to work remotely and pay taxes on their income. Meanwhile, stimulus money from the federal government kept consumers spending, which kept sales tax revenues healthy.
“Despite tax revenues holding up strong, the federal government provided massive amounts of aid to state and local governments, individuals and businesses, sustaining continued spending among taxpayers who otherwise would have cut back due to income or job losses amid COVID-19 shutdowns,” Loughead says.
Not only did the states benefit from direct federal assistance, the extra money consumers received from the federal pandemic aid boosted states’ revenues.
“The stimulus checks, expanded unemployment benefits and expanded child tax credits helped save and then jump-start the economy in a way that no one saw coming at the beginning of the pandemic,” Auxier says. “The tax revenue growth from economic activity gave states large surpluses.”‘
[Read: What Is the Child Tax Credit?]
Many of the tax changes took effect in 2022, but the IRS is still rolling some out in 2023 — and later.
You may see a difference when you file your income tax return this year — or benefit when you file next year’s. “Eleven states have already passed pretty good-size tax cuts this year,” Auxier says.
The tax breaks for individuals come in three main categories: income tax rate reductions, rebate checks and sales tax changes. Here are some of the key changes that 15 states made.
Income Tax Rate Reductions
Eleven states cut individual income tax rates as of Jan. 1, 2023, and some are still in the process of doing it.
“These are among the most significant for consumers, since income tax cuts increase the take-home pay taxpayers receive in their paychecks, allowing them to spend and save more, and allowing business owners to keep more of their profits to reinvest in their businesses,” Loughead says.
The following changes have the biggest impact on consumers, she adds.
Arizona joined the growing list of states switching from a graduated rate to a flat individual income tax rate structure in 2023. “This change occurred one year earlier than originally anticipated due to tax revenues exceeding specified targets,” Loughead says. Arizona now has a flat income tax rate of 2.5%.
Iowa enacted comprehensive tax reform in March 2022 that phases down the individual income tax from a top marginal rate of 8.53% in 2022 to a flat rate of 3.9% in 2026. “As of 2023, the top marginal individual income tax rate is 6%,” Loughead says. The same law also reduces the corporate income tax rate over time.
Kentucky reduced the individual income tax rate from 5% in 2022 to 4.5% in 2023. And on Feb. 17, 2023, another reduction will bring the rate to 4% in 2024, Loughead says.
Nebraska enacted a law in April 2022 that reduced the top marginal individual income tax rate from 6.84% to 5.84% by 2027 and reduces the top marginal corporate income tax rate from 7.5% to 5.84% by 2027. The first rate reductions took effect in January 2023 — the top rate is currently 6.64% for individuals and 7.25% for corporate income tax.
Arkansas reduced corporate income tax rates in 2022 and cut individual and corporate rates again in 2023. Governor Sarah Huckabee Sanders signed a bill on April 10, 2023, that reduced the top individual income tax rate from 4.9% to to 4.7% and cut the top corporate income tax rate from 5.3% to 5.1%.
Indiana enacted a law in March 2022 that reduced the individual income tax rate from 3.23% in 2022 to 3.15% in 2023 and 2024. The law also put in place tax triggers that could reduce the rate to as low as 2.9% by 2029, Loughead says.
[Related:New Income Tax Brackets for 2023 May Save You Money]
Flat Tax Rate Trending
One trend in income tax is the move to a flat rate.
“Since 2021, five states have enacted laws converting from a graduated rate to flat individual income taxes to avoid penalizing additional labor and investment on the margin and to attract and retain taxpayers, including resident taxpayers and pass-through businesses,” Loughead says.
In addition to Arizona and Iowa, these states include:
Mississippi eliminated its 4% individual income tax bracket on Jan. 1, 2023, and transitioned to a flat rate of 5%. The rate is scheduled to decrease to 4.7% in 2024 and gradually drop to 4% in 2026.
Georgia enacted a law in April 2022 that moves the state to a flat individual income tax rate of 5.49% as of Jan. 1, 2024, and establishes tax triggers that could phase it down to 4.99% over time.
Idaho enacted a law in September 2022 that reduced the individual and corporate income tax rates from 6% to 5.8% and shifted from a graduated rate to a flat tax. These changes took effect on Jan. 1, 2023.
Sales Tax Changes
Income taxes received the most cuts but a few states cut sales taxes or exempted some items from the tax:
“Income tax is the most effective tool you have for directing who pays the tax and who benefits from the tax cuts,” Auxier says.
New Mexico reduced its sales tax, known as the gross receipts tax, from 5.125% to 5% as of July 1, 2022; it will drop again in July 2023.
South Dakota reduced its general sales tax rate from 4.5% to 4.2%.
Kansas is gradually excluding groceries from the state’s 6.5% sales tax, reducing the rate on them to 4% in 2023 and 2% in 2024 — and making them completely exempt as of 2025.
Virginia enacted a law in June 2022 that eliminated the 1.5% state sales tax rate on groceries, leaving it at a 1% local sales tax.
[READ: Income Tax Burdens by State]
Rebate Checks
Eighteen states distributed rebate checks in 2022. Some sent the money to all taxpayers, while others based the payouts on income.
A few states have authorized rebates for 2023, too:
New Mexico sent all single taxpayers a rebate of at least $500 and married taxpayers at least $1,000 in 2022. Single filers earning less than $75,000 in 2021 and joint filers earning less than $150,000 were eligible for an extra $250 per person. Governor Michelle Lujan Grisham approved another round of rebates on April 7, 2023, which taxpayers will receive in the spring.
Georgia issued tax rebates of up to $250 for single filers and $500 per household in 2022, and it’s also sending another round of rebates in May 2023.
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Major State Tax Changes You Might Have Missed originally appeared on usnews.com
Update 04/19/23: This story was posted at an earlier date and has been updated with new information.
