More states are joining the bandwagon to cut income taxes

Income tax cut bills continue to sweep through state legislatures in 2022. Remarkably, they do so in many cases with broad support from Democrats and Republicans alike. . In a unanimous bipartisan vote, the South Carolina Senate passed legislation on March 11, this will reduce the state’s top marginal tax rate from 7%, currently the highest tax rate in the southeastern United States, to 5.7%. The passing of this income tax cut in the South Carolina Senate comes weeks after the South Carolina House unanimously approved legislation that also provides income tax relief, but differs from the Senate plan in a few key details.

While the bill passed by the Senate lowers the top marginal tax rate to 5.7%, the bill approved by the House lowers it to 6% over the next five years. The House and Senate tax plans exempt military retirement income from state taxes. The income tax cut passed by the Senate also reduces property taxes for manufacturers. The House-approved plan, meanwhile, collapses the lower brackets to which the higher rate does not apply into a single 3% bracket. With the help of healthy fiscal reserves and a continued surplus, 2022 is shaping up to be the year South Carolinians stop watching neighboring states pass tax breaks as Palmetto State’s tax code remains intact.

“There is a substantial amount of money in dollars not only coming from General Fund revenues, but also from the federal government,” noted Sen. Tom Davis (R-Beaufort). Davis added that, “given the robust growth, recurring revenue and all that one-time money, these tax cuts weren’t unreasonable in this context.”

While the income tax reduction programs that have gone through both houses of the South Carolina Legislature will bring relief to South Carolinians, the state will likely still have the income tax rate highest income in the region, even though South Carolina’s top rate is cut to 5.7% as the plan passed by the Senate requires. As such, top lawmakers say this is just the first step in a journey toward a more comprehensive overhaul of the state’s tax code. “We are not doing a comprehensive tax reform. I understand,” noted Sen. Sean Bennett (R-Summerville) in early March. “Do you know why? Because it’s hard.”

There is a reason why reducing the rate to 5.7% will not relieve South Carolina of its current distinction of being the country with the highest income tax rate in the region and that reason is the recently voted tax cut in the Georgia State House. Georgia is one of several states where lawmakers have increased their tax advantage over South Carolina and other states in recent years with the enactment of income tax relief. In 2018, then-Governor Nathan Deal (R) signed into law an income tax cut that raised the state’s top rate from 6% to 5.75%. In 2021, Governor Brian Kemp (R) granted more tax relief by signing into law legislation to increase the standard deduction. Now Governor Kemp and Georgia lawmakers are proposing legislation this year that will again cut the state’s top tax rate and collapse the lower brackets to create a fixed income tax of 5.25%.

The Georgia House of Representatives adopted this income tax reduction on March 9 with a 115-52 vote. The state Senate is expected to follow suit, sending the income tax cut to Gov. Brian Kemp’s office sometime this spring. When asked if Stacey Abrams, the Democratic nominee to take Governor Kemp from her, supports the income tax cut recently approved by the Georgia House, Abrams’ campaign declined to comment.

A similar dynamic to Abrams’ first gubernatorial bid four years ago is again at play. During this campaign in 2018, the Georgia legislature passed the aforementioned income tax cut. which was eventually signed into law by then-Governor Deal. After initially opposing and denouncing this income tax cut, Abrams then went on to clarified his opposition note that she would not seek to repeal this income tax cut if elected governor.

On March 4, Kentucky joined the list of states seeking to become the 10th income tax-free state when the state House of Representatives passed Bill 8, a law that will reduce income tax from 5% to 4% next year. HB 8 will also plan for the complete elimination of state income tax over time, provided specified revenue targets are met in future years.

“We compete with 49 other states in a truly global economy, and tax policy moves people,” noted Kentucky Rep. Steven Rudy (R-Paducah) explaining the motivation to provide tax relief and ultimately eliminate income tax altogether.

Being bordered by Tennessee, a no-income-tax state where lawmakers continue to find ways to further improve their tax code and provide even more relief to taxpayers, it is especially imperative that Kentucky lawmakers seek ways to make their tax code more competitive and less burdensome. The income tax phase-out bill passed by the Kentucky House is now before the state Senate for consideration. The legislative session is expected to adjourn in mid-April.

Kentucky isn’t the only state bordering Tennessee where lawmakers are proposing legislation to join the voluntary state in the club of no-income-tax states. 10 days after the Kentucky House approved its bill to phase out its income tax, legislation to phase out Mississippi’s income tax was sent to the Mississippi House of Representatives. The income tax phase-out plan passed by the Mississippi House on March 14 was a revised version of a proposal that passed the Mississippi House in January by a bipartisan vote of 107 to 4.

‘We can lay down the welcome rug for dreamers and visionaries,’ Governor Tate Reeves (R) noted the prospect of Mississippi becoming a state with no income tax. “We can move more money through our economy. And that can lead to more wealth for all Mississippians.

The ball is now back in the court of the Mississippi Senate, where members aren’t as keen on phasing out the state income tax as the House of Representatives and Governor Reeves are. The Mississippi legislative session is due to end in April and it is possible that this matter will be referred to a special session.

The push for income tax relief and even elimination is not limited to southern states or even red states this year. Indiana lawmakers approved a bill on March 9, the last day of the 2022 legislative session, which will reduce Hoosier’s state flat tax rate from 3.23% to 2.9% over the next seven years. On March 1, Iowa Governor Kim Reynolds (R) signed an invoice to reduce his state income tax to a flat rate of 3.9% over the next four years. Changes signed into law by Governor Reynolds and Iowa lawmakers significantly reform and simplify the state’s income tax code, which currently consists of nine different brackets with a top rate of 8.53%. The move by Reynolds in Iowa came weeks after Idaho Governor Brad Little signed into law the state’s first income tax cut of 2022, which was the largest in the state. Idaho history. Shortly after Idaho lawmakers enacted the state’s first income tax cut of the year, Utah lawmakers followed suit.

Idaho and Utah may not be the only Mountain West states where taxpayers are getting an income tax cut in 2022. On March 16, a ballot has been filed with the Colorado Secretary of State that, if approved by voters in November, will reduce Colorado’s flat tax rate from 4.55% to 4.40%. Colorado voters cut state income tax from 4.63% to 4.55% in 2020 by approving Proposal 116. Legislation to reduce state income tax was recently defeated in committee. Although the Democratic-controlled House and Senate in Colorado seem unwilling to pass income tax relief, voters will now have the opportunity to do so themselves.

“Fortunately, we have placed a permanent income tax cut on the ballot this fall,” writes Jon Caldara, president of the Independence Institute and sponsor of the new income tax cut that will will appear on the November ballot. “It will be fascinating to see if voters agree with the Democratic lawmaker who killed the idea.”

The income tax cut offered to Colorado voters in 2020 was opposed by Democratic leaders in the state legislature but was supported by Gov. Jared Polis (D). It will be interesting to see if Governor Polis opposes his party again by backing the new income tax cut in November. Governor Polis’ office has been contacted to see if the Governor has a position on the new income tax cut to appear on the 2022 general election ballot. This article will be updated to include the Governor’s office’s response. governor, if any.

Lawmakers in 14 states have enacted income tax relief in 2021. It will be tough to top that in 2022, but based on activity in state capitols so far, it’s possible. .

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