Just Taxes Blog by ITEP

State Rundown 2/1: February Brings New (and Some Old) Tax Policy Conversations

February 1, 2023

.ITEP Staff

Tax bills across the U.S. are winding their way through state legislatures and governors continue to set the tone for this year’s legislative sessions. In New Mexico, the governor provided more specifics on her plan to send one-time rebate checks of up to $1,500, whereas the Michigan House and Senate have passed bills that would increase the state Earned Income Tax Credit to benefit low- and middle-income families and ultimately eliminate the state’s taxes on retirement income. The latter a costly, untargeted move that increases inequities and reduces the resources for deep investments. Both policies were priorities outlined in Gov. Gretchen Whitmer’s annual address. Arizona Gov. Katie Hobbs released her fiscal 2024 budget and included funding for a $100 Child Tax Credit for low-income families. Meanwhile, in the Old Line State, Gov. Wes Moore proposed expanding the military retirement exemption, while Gov. DeWine of Ohio called for an income tax deduction for children in addition to several other tax changes. Last, and certainly least, Gov. Tate Reeves made eliminating the state income tax a priority in his yearly address on the state of Mississippi.

Major State Tax Proposals and Developments

  • NEW MEXICO Gov. Michelle Lujan Grisham announced her plan to send one-time rebates of $750 to individual filers and $1,500 to joint filers this summer. —MARCO GUZMAN
  • The MICHIGAN House and Senate both passed similar bills to increase the state’s EITC and repeal the state’s tax on retirement income over time. Both proposals have been a priority for Gov. Gretchen Whitmer. — MILES TRINIDAD

Governors’ Annual Addresses and State of State Speeches

  • In his 2023 State of the State address, MISSISSIPPI Gov. Tate Reeves, called for eliminating the state’s income tax.
  • MARYLAND Gov. Wes Moore focused on ending child poverty and included in his budget more than $171 million in tax reductions to low-income and working families. This includes a permanent extension of the Earned Income Tax Credit and expansion of the state’s limited, temporary Child Tax Credit.
  • MICHIGAN Gov. Gretchen Whitmer proposed tax reductions by repealing the state’s tax on retirement income and boosting the state’s Earned Income Tax Credit. Both the House and Senate have passed their own versions of these proposals.
  • In OHIO Gov. Mike DeWine’s speech, he proposed a handful of tax policies focused on children, such as a $2,500 income tax deduction per child and exempting infant supplies like diapers and car seats for the state sales tax. DeWine also proposed the creation of a low-Income housing tax credit and single-family housing tax credit to incentive housing construction.

State Roundup

  • ARIZONA Gov. Kaite Hobbs released her FY2024 budget and in it included a $100 Child Tax Credit for low-income families.
  • COLORADO Democrats have introduced bills to increase the state Earned Income Tax Credit (EITC) to 40 percent of the federal credit in 2024 and would ratchet up the Child Tax Credit to a maximum of 70 percent and match federal eligibility standards for children. Meanwhile, COLORADO Republicans introduced a bill that would provide a tax credit for property taxes in tax years 2023 and 2024.
  • CONNECTICUT lawmakers face a bevy of tax proposals this year, with Gov. Ned Lamont favoring rate cuts for middle- and upper-middle-income households and a permanent increase to the state EITC after last year’s temporary boost. Others are prioritizing making last year’s temporary Child Tax Credit (CTC) larger and permanent.
  • The KANSAS Chamber’s flat tax proposal, which was introduced in both legislative chambers, is estimated to cost $1.5 billion with 49 percent of the income tax reduction benefiting the richest 20 percent of Kansans. Reporting on the proposal notes that it would cost the state more than the failed tax cuts under former Gov. Sam Brownback.
  • KENTUCKY Governor Andy Beshear is navigating House Bill 1, a proposal to further reduce the state’s income tax and increase its sales tax. Although Gov. Beshear has expressed skepticism, Republican lawmakers could potentially override a veto of the proposal.
  • MARYLAND Gov. Wes Moore introduced a proposal providing state tax cuts for military retirees. The proposal would expand the military tax exemption to $25,000 in 2023 and $40,000 in 2024. Under current law, military retirees can deduct $5,000 from their taxable income if they are under 55 years old and $15,000 if they are 55 or older.
  • MICHIGAN Gov. Gretchen Whitmer’s office is exploring a policy that would prevent an automatic decrease in the state’s income tax due to the state’s budget surplus by tying it to tax legislation that is moving through the legislature.
  • The first big test for NEBRASKA Gov. Jim Pillen’s proposal to undermine investments in state residents and services by giving out tax cuts to high-income households will come this week when the tax cut bill receives a public hearing on Thursday.
  • NEW YORK Gov. Kathy Hochul’s budget proposal includes a payroll tax on part of the state to bolster funding for the New York City subway system and an extension of an existing tax on large corporations, which was otherwise scheduled to expire at the end of 2023. A separate proposal in NEW YORK would change taxation of “mezzanine” loans to treat them more like regular mortgage loans.
  • The SOUTH DAKOTA House Appropriations Committee passed a reduction of the state’s sales tax from 4.5 percent to 4 percent. As lawmakers continue to focus on tax cuts, the legislation follows proposals to repeal the state’s grocery tax and reduce the property tax.
  • TENNESSEE lawmakers are continuing to move a retaliatory proposal to remove the city of Nashville’s authority to collect a tax used to operate and pay the debt of the city’s convention center.
  • TEXAS lawmakers are considering various proposals to cut the state’s property tax levels, although have not settled on an amount. The state has a substantial—although likely temporary—surplus and constitutional spending limits.

What We’re Reading

  • Brookings Metro’s Amy Liu and Peter Rezk lay out the centrality of metropolitan areas to nearly every state economy and discuss the problems caused by conflict between state and local governments.
  • A New York Times article highlights research finding that Black filers were more than three times as likely to be audited by the Internal Revenue Service as others were. While the findings don’t suggest bias from the agency’s workers, it does note that the discrimination is due in large part to decisions by officials to rely on automated enforcement systems in the face of budget cuts.
  • Governing provides an overview of public finance issues likely to dominate headlines in 2023, including misguided tax cut proposals and the possibility of a recession.
  • An op-ed in the Salt Lake Tribune deftly explains how potential cuts to the state’s flat income tax will come at the expense of funding for vital public services like education.

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