State Rundown 2/23: Tax Dominos Take Shape, Begin to Fall as Session Heats Up

The 2023 legislative session is in full swing, and dominos continue to be set up as others fall. This week, the biggest domino to fall came in Kentucky, as the governor signed a bill that will cut the state’s flat income tax from 4.5 percent to 4 percent. The governor clearly missed ITEP’s recent blog from Carl Davis highlighting 5 of the best tax ideas coming out of the states this year—spoiler alert: tax cuts that primarily benefit the wealthy aren’t on the list. Davis highlighted proposed policies that focus on taxing income from wealth, improving tax credits that help increase families’ economic security, and taxing profitable corporations, to name a few. Meanwhile, dominos in Utah have been set, as Republicans unveiled their $400 million tax cut plan that also includes a big income tax cut, while another has been propped up in Arizona, as a plan to slash the corporate tax rate in half has passed in the House along party lines. And further down the line you may find the reason for the proposed cut: lawmakers are looking to court global microchip manufacturers that may relocate to the states as a result of the incentives offered in the CHIPS Act of 2022.

Major State Tax Proposals and Developments

• KENTUCKY Gov. Andy Beshear signed a major tax cut—House Bill 1—despite near universal opposition from Democratic lawmakers. As a result, Kentucky’s income tax rate will drop from 4.5 percent to 4.0 percent. — ELI BYERLY-DUKE
• ARKANSAS Gov. Sarah Huckabee Sanders signed a bill into law yesterday that prohibits local governments from enacting income taxes. Although no localities currently have a local income tax in place, this type of state interference prevents local policymakers from being able to serve their communities. —BRAKEYSHIA SAMMS
• UTAH‘s economy may be beginning to slow, but it hasn’t stopped Republican lawmakers from unveiling their $400 million tax cut bill, which includes a cut from 4.85 percent to 4.65 percent to the personal and corporate income tax, an increase to the Earned Income Tax Credit, expanding the Social Security benefits credit, and allowing pregnant women to claim the state’s dependent exemption. — MARCO GUZMAN
• The UTAH Senate Revenue and Taxation Committee passed a resolution that would place a proposed constitutional amendment on the November 2024 ballot that would remove the earmark on income tax revenue. If the voters approve the amendment, lawmakers plan to repeal the state grocery tax beginning in 2025. — MARCO GUZMAN

State Roundup

• A bill that would cut ARIZONA‘s corporate income tax rate from 4.9 percent to 2.5 percent by 2026 passed out of the House by a 31-29 party line vote. The bill will now head to the Senate. The push to cut the state’s corporate income tax rate comes as lawmakers at the state and federal level have begun jockeying to make ARIZONA the place for microchip manufacturing operations. The CHIPS Act of 2022 will soon provide $52 billion in subsidies and tax credits to global manufacturers that choose to expand or create new operations in the United States.
• Several COLORADO bills aimed at helping families deal with inflation have been introduced, including bills to increase the state’s Earned Income Tax Credit, the Child Tax Credit, and to extend the Child Care Contribution credit through 2027.
• Recent polling in CONNECTICUT found 71 percent of respondents, including majorities of both major parties and independents, support raising income taxes on millionaires and 81 percent support doing so for billionaires.
• Also in CONNECTICUT, lawmakers are considering film tax credit increases and a nickel-per-round tax on bullets.
• Lawmakers in FLORIDA introduced legislation that would reduce the annual tax cap for homestead property from 3 percent to 2 percent. The proposal is estimated to cost around $150 million.
• INDIANA lawmakers continue to advance a bill which would simplify and expand the state’s Earned Income Tax Credit.
• Despite caution from the Senate the INDIANA House of Representatives passed a budget bill that would speed up scheduled cuts to personal income tax rates. Under their proposal the state will move to 3.0 percent in 2024 and 2.9 percent in 2026, which is three years sooner than expected.
• KANSAS lawmakers proposed legislation that would remove the sales tax on grocery items that the Women, Infants, and Children (WIC) program considers healthy, such as fruits, vegetables, meat, and fish.
• After MICHIGAN lawmakers in both chambers passed its tax package that included an increase to the Earned Income Tax Credit, a decrease to retirement pension taxes, and $180 rebates for tax filers, Senate Democrats introduced a resolution that would allow the legislation to take immediate effect despite initially lacking support. This would allow the legislation to avert an automatic income tax trigger caused by higher-than-expected state revenue due to federal pandemic aid.
• A MISSOURI state senator has advanced a proposal to phase out the state’s corporate income tax. The state already has very low taxes on corporate income which have not been enough to attract new firms in the face of the state’s insufficient services and public investments.
• Some NEW YORK lawmakers are championing a plan to reform the state’s credits for middle- and low-income families into a single comprehensive Working Families Tax Credit that would seek to simplify the credits, boost the incomes of New Yorkers, and advance tax justice in the state.
• NEW YORK Gov. Kathy Hochul has proposed adding $1 per pack to the state’s $4.35 cigarette tax.
• Due to lack of agreement between House and Senate members, it doesn’t appear that tax cuts or rebates are likely to happen in MISSISSIPPI. Republican House and Senate leaders say these policies could come back through amendments to other bills, but that is unlikely due to missing Wednesday’s deadline for submitting revenue and appropriations bills.
• The NORTH DAKOTA House passed three bills that would reduce the state’s income tax. One bill would replace the income tax with a flat tax rate of 1.5 percent and eliminate the tax for single filers earning under $44,750 and joint filers earning under $74,750. A second bill would set a flat 1.99 percent income tax rate and provide credits of $800 for single filers and $1,600 for joint filers. The last bill would incrementally reduce income tax rates if state revenue is higher than expected.
• The NORTH DAKOTA House passed several new sales tax exemptions for children’s diapers, grain bins, components for scientific research, and building materials for hospice facilities, biofuel refineries, and coal processing plants; however, the legislature failed to pass a repeal of the ‘pink tax’ that would have included a sales tax exemption for feminine hygiene products like tampons.
• The NORTH DAKOTA House also passed legislation that would repeal an automatic trigger that increases the oil production and extraction rate if the price of oil stays above $95 per barrel for three consecutive months.
• In OKLAHOMA, House Bill 1935 proposes tax credits for non-public schooling passed the House and is headed to the Senate. Under HB1935, families could receive $5,000 in refundable tax credits for each child they send to private schools or $2,500 for kids educated by other means, such as homeschooling.  Outside of K-12 education, there is a bill for people who graduate from college and stay in Oklahoma. Under House Bill 2138, they would receive an exemption of $75,000 for their income for each year, up to two years.
• OREGON kicker rebate, which returns excess state revenue to taxpayers, is expected to grow to $3.9 billion. However, the growing rebate comes as state economists forecast the state will have $3 billion less general fund and lottery revenue to spend in the next biennium.
• The SOUTH DAKOTA House passed legislation that would reduce the state’s sales tax from 4.5 percent to 4.2 percent. The move came after the House Appropriations Committee rejected Governor Kristi Noem’s proposal to repeal the state’s grocery tax.
• TEXAS Gov. Greg Abbott has been promoting his short and long-term ideas about property taxes. Late last week he proposed his budget, and it included a $15 billion cut to property taxes. Abbott proposed maintaining existing cuts to school property taxes made under the school finance reform in 2019 and using state dollars to further reduce taxes under that law. His long-term plans were presented to the Arlington Chamber of Commerce, where he vowed to eliminate paying property taxes for school districts.
• WASHINGTON State lawmakers are considering a 2.5 cents per mile vehicle usage tax that would start out as a voluntary program combined with a credit for gas taxes and become universal in 2030.

What We’re Reading

• Pew’s State Fiscal Health initiative warns that the conditions creating the current state tax revenue boom are showing signs of taking a turn for the worse within the current budget year due to “several looming challenges, including slowing revenue growth as the economy weakens and monetary policy tightens, historically high inflation, and a tapering of federal COVID-19 aid.” Pew experts recommend states undertake long-term budget assessment and budget stress tests before committing to costly changes that could create painful deficits.
• Governing looks at inequities in property tax valuations between low- and high-value homes and how Cook County, Illinois, has sought to address them and associated racial inequities through more sophisticated statistical modeling.
• New Jersey Policy Perspective published a report arguing that lawmakers should reauthorize the 2.5 percent Corporate Business Tax surcharge that is scheduled to expire at the end of 2023.

 

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