Which States Have Lowest Taxes - It is not unusual for a theme to emerge from state legislative sessions as each state responds to similar economic or national trends. However, from the perspective of a year ago, it is notable that the dominant tax policy trend in the states during their 2021 legislative sessions – which have now ended in many states – was tax cuts. With rising incomes and the prospect of workplace flexibility greatly increasing the importance of tax competition, 11 states have cut personal or corporate income taxes — or both — so far in 2021, and there's every reason to believe more states will follow suit. if not this year, then undoubtedly in 2022.
States ended fiscal year 2021 with significantly more revenue than most thought possible in the early days of the COVID-19 pandemic. This is true even when looking exclusively at taxes or other own-source revenues, and excludes any federal transfers under the CARES Act, the American Rescue Plan Act, or other federal legislation enacted in response to the pandemic. Taxable incomes have grown in recent years, partly because of limited federal infusions, but largely because long-term economic trends have remained almost unabated. States that have emerged from the public health crisis, not only with sufficient revenues, but in many cases strong growth, have recognized an opportunity for tax relief. Moreover, many decision-makers saw it not just as an opportunity but as a necessity, a way to demonstrate the state's commitment to taxation and general economic competitiveness in an increasingly mobile world.
Which States Have Lowest Taxes
In early 2020, economic uncertainty reigned and most government economists were understandably preparing for the worst: revenues would fall and may not recover quickly. States will have to drastically cut spending and then eventually raise taxes. State legislatures responded to these dire economic forecasts by cutting spending, drawing from their rainy day funds and in some cases even raising taxes by making changes to the corporate income tax base, such as California, or by increasing individual income tax rates, such as New York.
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But as vaccines became widely available in the U.S. this year, many states recovered quickly, and as states close their books for fiscal year (FY) 2021, most are finding themselves with extra money, or at least nowhere near of the size of the income. rejection that they had previously expected.
While one-time federal aid played an important role in helping states cope with the pandemic, many states' economies continued to grow on their own, with income and sales tax collections proving resilient despite the circumstances.
Now that a clearer fiscal picture is emerging, with many states projecting robust, continued revenue growth over the next several years, policymakers have responded to their strong fiscal health through a combination of increased savings and increased spending and, in many states, work to strengthen this competitive advantage by returning additional revenue to taxpayers in a way that will make their tax code less economically damaging and more attractive in an increasingly competitive national landscape.
As shown in Table 1, each of the states that enacted income tax rate cuts so far in 2021 saw overall growth in fund tax revenues in FY 2021 compared to FY 2019, the last fiscal year before the pandemic.
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The eleven states that lowered income tax rates in 2021 saw significant growth in general fund tax revenue between FY 2019 and FY 2021.
Sources: State revenue bodies. Several states only had data through May, not June (the end of the fiscal year); eleven month figures for both financial years have been used for comparability.
So far in 2021, 11 states have passed laws to lower their income tax rates, with varying effective dates. Specifically, 10 states enacted individual income tax cuts and five enacted corporate tax cuts. In many states, these rate cuts are accompanied by other structural improvements to their income tax base, such as consolidating brackets to create a more neutral structure, eliminating the state deduction for federal taxes paid, or complying with the federal government's more generous standard deduction.
An additional state, North Carolina, is also looking at individual and corporate tax rate cuts this year. The budget passed by the Senate, S.B. 105, would reduce the state's flat individual income tax rate from 5.25 to 3.99 percent by 2026 and phase out the corporate tax entirely by 2028. With a flat individual income tax rate of 3.99 percent, only North Dakota, Pennsylvania and Indiana have a lower top rate. If North Carolina were to phase out its corporate income tax, it would be one of only three states — the others being South Dakota and Wyoming — that would levy neither a corporate income tax nor a statewide gross income tax.
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States that have not already acted to improve their tax competitiveness should consider how they too can use their strong fiscal relationships to enact meaningful tax reforms that will help their state compete for business investment and attract and retain new residents, especially as telecommuting becomes more usual. . And they should avoid the opposite policies of California, which ignored evidence of strong revenue growth to justify adopting structurally disadvantageous measures to boost corporate tax revenues—the state would end up with a $76 billion surplus[2]—or New York, which passed. $4.3 billion in tax increases for individuals and businesses even after the feared revenue losses did not materialize.[3]
The following pages provide an overview of the income tax reforms enacted in 11 states so far this year. Politicians in other states have a decision to make. Will they double down on uncompetitive taxes, like California and New York? Will they do nothing, happy with their current tax codes? Or will they, like these states, seize an opportunity to attract new mobile workers and employers, positioning their states for future growth?
On June 30, 2021, Governor Doug Ducey (R) signed a fiscal year (FY) 2022 budget that includes significant reforms to the state's individual income tax rates and brackets. These reforms were contained in Senate Bills 1827, 1828, and 1783.[4] These reforms will reduce tax collections by about $1.9 billion annually when fully phased in and help restore the state's competitive position -- especially in contrast to California, which lured many individuals and businesses away -- in the wake of a recently passed ballot measure that increases taxes on high incomes.[5]
Until these changes were passed, Arizona had four general individual income tax brackets with rates ranging from 2.59 to 4.5 percent, with revenue dedicated to the general fund. In addition to the general rates, a surcharge of 3.5 percentage points under Proposition 208, narrowly passed by voters in November 2020, is imposed on taxable income over $250,000 (single filers) or $500,000 (married filing jointly), with income dedicated to education. Plug. 208 is currently being challenged before the Arizona Supreme Court. If the surcharge is upheld, the surcharge will become due on income earned beginning January 1, 2021, but the Arizona Department of Revenue has not so far required employers to withhold the surcharge from affected taxpayers.[6]
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Absent the reforms passed in June, Arizona's top marginal rate would have been 8 percent beginning in fiscal year (TY) 2021. However, Senate Bill 1827 established a cap to prevent the combined top marginal rate from exceeding 4.5 percent when general rates and Prop. 208 allowance is combined. As such, for taxpayers with taxable income that Prop. 208 threshold, 3.5 percent of that income will be sent to the education fund as Prop. 208, while the remaining 1 percent is sent to the general fund.
Under Senate Bill 1828, the four general fund rates would be consolidated into one, and the rates would be reduced over time. Specifically, the 4.5 percent cap is retroactive to January 1, 2021, meaning Arizona's rates for TY 2021 will match the rates in place prior to Prop. while some will go to the general fund.
In TY 2022, the two highest brackets will be eliminated, and the two remaining rates will be reduced from 3.34 to 2.98 percent and from 2.59 to 2.55 percent, respectively. Then, after general fund income exceeds a specified benchmark of nearly $12.8 billion, the 2.98 percent rate will be reduced to 2.75 percent, and the 2.55 percent rate will be reduced to 2.53 percent. Once earnings exceed a benchmark of nearly $13 billion, the 2.75 percent rate will be eliminated, and the remaining general funds rate will be reduced from 2.53 to 2.5 percent. Absent the Prop. 208 amendment, Arizona - at the time - would have a flat individual income tax with a low rate of 2.5 percent, but the 3.5 percent surtax, subject to the combined limit of 4.5 percent, results in a two-rate system, with taxable income below $250,000/$500,000 subject to a rate of 2.5 percent and income above this threshold taxed at a rate of 4.5 percent.
A separate law, SB 1783, creates an entity-level tax election option for owners of pass-through businesses, allowing them to pay income taxes under a separate system rather than under
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