Flush With Federal Covid Cash, State Lawmakers Look To End Income Taxes

With at least 11 states preparing to enact individual income tax reductions starting January 1, several money-flush states are also signaling a desire to go one step further and eliminate state income taxes altogether. Arizona, Idaho, Indiana, Iowa, Kentucky, Mississippi, Missouri, Nebraska, New York, and North Carolina all passed legislation in 2022 to reduce income tax rates beginning in the new year. New Hampshire, which does not have a state income tax on wages, will eliminate taxes on interest and dividend income. Utah, a flat-tax state, and Arkansas also passed legislation in 2022 to reduce personal income tax rates. Both were made retroactive to 2022.Currently, nine states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming — don’t assess personal income taxes at all. More may follow suit. Officials in Iowa, North Dakota, and Wisconsin all offered income tax-elimination proposals this year. Officials in West Virginia, Arkansas, Mississippi, Indiana, and Georgia have said the issue will come up again in 2023. “It’s going to mean there’s less revenue for us to spend at the state level, but at the same time, we attract businesses to the state of Indiana,” a Republican in the Indiana senate, Travis Holdman, told a local legislative conference in his district last week. Mr. Holdman, chairman of the state’s Tax and Fiscal Policy Committee and a member of the Appropriations Committee, has proposed a commission to consider reforming the tax structure and potentially repealing the state income tax by 2030. Several Hoosier lawmakers have expressed support for large-scale reforms and say now is the time.Several factors account for strong state budgets. State treasuries are flush with federal cash from pandemic-era federal stimulus programs such as the American Rescue Plan. Federal money has not only been sent to states, but also directly into taxpayers’ hands. The reported income gains, and taxes on those gains, have propped up states’ general funds. Other contributors are also at play, including growth in jobs and wages, increased consumption from pent-up demand, and higher inflation, Kathryn White of the National Association of State Budget Officers, a professional membership of state budget directors and chief financial officers, said.Inflation “will in turn drive state revenue growth because of the sales tax side. Prices go up, taxes go up,” Ms. White told the Sun.Forty-nine states reported surpluses in their general funds for fiscal year 2022, with collections exceeding original projections by 20.5 percent in total. Thirty-three states are predicting that 2023 revenues will exceed expenditures, according to the association’s Fall Fiscal Survey of States. Ms. White said 45 percent of state revenues comes from personal income taxes.Eliminating income tax revenues, however, would require substantial fiscal discipline on the part of state lawmakers. Arkansas’s 2023 budget projects $6.6 billion in earnings, of which almost $3 billion is expected to come from personal income taxes. Its largest sources after personal incomes are federal transfers, general sales taxes, and charges such as state university tuition and highway tolls.Indiana earned $8.2 billion in revenue from individual income taxes in 2022, 38 percent of the state’s overall tax revenue, according to the budget officers association.Mississippi derives 34 percent of its state revenue from income taxes, which opponents of tax cuts say would be difficult to replace. “The state of Mississippi desperately needs water, sewer, and roads. We cannot give away one-third of the state’s revenue and have enough money to provide basic services,” a Democratic state senator, Hob Bryan, told the Associated Press. Surplus funds for one-time investments in capital construction, paying down debt, and making supplemental pension payments could strengthen states’ fiscal resiliency over the longer term. A little strategic planning could offset a future economic downturn. The Mississippi house speaker, Philip Gunn, who presides over the Legislative Budget Committee, approved budget recommendations for 2023 earlier this month with a $1 billion surplus already ticketed. He said he will push for the elimination of the state income tax when lawmakers return to Jackson in January. Mr. Gunn’s move is supported by the state’s Republican governor, Tate Reeves. West Virginia reported a record $420 million surplus in the first three months of fiscal year 2023, and that is expected to continue. The state notched a $1.3 billion surplus in fiscal year 2022.“Without question, the elimination of our personal income tax will drive growth and prosperity to our state for decades to come,” Governor Justice said in a statement. Overall, 31 states passed net cuts in taxes and fees for fiscal 2023. The cash to taxpayer pockets should total about $16.2 billion in 2023, according to the budget association report.

Flush With Federal Covid Cash, State Lawmakers Look To End Income Taxes

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