June 27, 2022
Like Georgia, more states are cutting income taxes in what is mostly a bipartisan effort nationwide. In 2021 alone, 14 states took steps to cut income taxes. So far in 2022, dozens of states are following suit to either lower or flatten their income taxes, and several others have been looking at proposals to lower or temporarily suspend certain excise taxes. Still, others have been considering temporary tax measures. By comparison, only two states have proposed raising taxes in 2022: Hawaii and Massachusetts. What’s driving the nationwide race to cut taxes?
Many states are coming out of the pandemic with more cash reserves due to COVID relief funds. On top of those one-time funds, many states have seen job growth and economic activity rebound. That means that state tax collections are up, and in many cases, significantly beating early projections. A higher state fund is a trigger in some states that automatically issues refunds back to taxpayers. It can also be a signal that broader tax relief is doable.
Changing tax policy is another factor. Global business on a local scale was already happening before COVID. The pandemic accelerated and expanded that movement, and the result is that states now must compete for business from more places than before. Companies can be more mobile, and employees can live virtually anywhere and work remotely. States are looking to minimize their tax burdens to remain competitive.
Katherine Loughead, senior policy analyst for the Tax Foundation, commented in a May 2022 article that “If your state isn’t cutting taxes this year, it’s in the minority.”
Tax reduction strategies look a little different everywhere. Lowering income taxes is just part of it. Other taxes are on the chopping block, too. The following is a list of taxes that are targeted for either permanent or temporary rate reductions. Some states have already passed legislation while others have only just introduced it. This isn’t an exhaustive list and at the rate that state tax laws are changing, it will probably expand before the summer is over.
In Georgia, for example, Governor Kemp signed legislation to make way for a lower, flat statewide income tax over the next several years. That came on the heels of a 2018 tax cut. After several more changes, Georgia’s tax climate will become one of the friendliest in the region.
Neighboring South Carolina, which has the highest tax rate in the Southeast, voted to lower its income tax. Legislators acknowledged that it’s not tax reform, but a step in the right direction.
Nearby Kentucky will become one of a few states without any income tax. Earlier this year, elected officials voted to lower the state income tax from 5 to 4 percent in 2023 and put in motion plans to phase it out completely over time. Just days after Kentucky passed its plan to remove the income tax, Mississippi began to follow suit.
Outside of the Southern U.S., tax reform and tax reduction are top of mind for others, too. As of April 2022, the following states have lowered their income taxes:
The answer to that question depends on who is asked, how far removed from the tax relief the question is, and what conditions are like. Average taxpayers would probably agree that tax cuts are in the best interest. Long-term, that might not always work out. At the rate of nationwide tax cuts, there’s bound to be concern if the tax relief strategy is an effective one.
In 2012, Kansas cut taxes and the ensuing revenue crisis has served as somewhat of a cautionary tale of good intentions gone awry. 25 states have lower income taxes now than in 2012, and with different results.
On average, tax collections in states that lowered the tax rate rose slightly higher than in states that raised the tax rate. The states that cut taxes also saw higher population growth, and more taxpayers mean higher collections. Lower tax rates on their own don’t cause higher collections nor do they tend to pay for themselves. There are many factors at play. The commonality is that a more competitive tax landscape is generally just better for business, which in turn fuels economic growth and collections.
Still, the concern is that if revenue slows in future years, the tax cuts that are promised now may not be sustainable. Some states are forecasting a weaker fiscal year 2023 due to stalled economic growth and inflation.
Rebate checks are one way that states can offer tax relief without committing to permanently lower rates. In Georgia, trigger laws are in place to halt future reductions if certain conditions aren’t met. Safeguards can provide taxpayers with relief while also protecting state revenue.
A more mobile economy is forcing states to adopt tax policies in ways they might not have considered just a couple of years ago. It’s important to note that not all these tax cuts are permanent. Some, like Georgia, are part of statewide tax reform. Other states’ tax relief represents a temporary reprieve to help residents weather higher costs and an uncertain economy.
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It appears that states across the Southeast will continue to reduce income and other taxes creating a saving opportunity for businesses with multistate operations. Given the amount of change occurring, it is important to review your state tax liabilities and determine how the business will be impacted. If you have questions about the information outlined above or need assistance with a state tax issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.