More States Join Income Tax Cut Movement

Income tax cutting bills continue to sweep through state legislatures in 2022. What’s noteworthy is that they’re doing so in many cases with broad support from both Democrats and Republicans. In a bipartisan and unanimous vote, the South Carolina Senate passed legislation on March 11 that will cut the state’s top marginal income tax rate from 7%, currently the highest income tax rate in the southeastern U.S., to 5.7%. Passage of that income tax cut in the South Carolina Senate comes a few weeks after the South Carolina House unanimously approved legislation that also provides income tax relief, but differs from the Senate plan on a few key details.

Whereas the Senate-passed bill takes the top marginal income tax rate down to 5.7%, the House-approved bill takes the top rate down to 6% over the next five years. The Senate-passed income tax cut also reduces property taxes for manufacturers and eliminates taxation of military retirement income. The House-approved plan, meanwhile, collapses the bottom brackets to which the top rate does not apply into a single 3% bracket. With the help of healthy budget reserves and an ongoing surplus, 2022 is shaping up to be the year South Carolinians stop watching neighboring states pass income tax relief while the Palmetto State’s tax code remains untouched.

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

While the income tax cut packages that sailed through both chambers of the South Carolina Legislature will provide relief to South Carolinians, the state will likely still have the highest income tax rate in the region even if South Carolina’s top rate is brought down to 5.7% like the Senate-passed plan calls for. As such, key lawmakers are indicating that this is just a first step in a journey toward a more comprehensive overhaul of the state tax code. “We’re not doing comprehensive tax reform. I get it,” said Senator Sean Bennett (R-Summerville) in early March. “You know why? Because it is hard.”

There is a reason why cutting the rate down to 5.7% won’t relieve South Carolina from its current distinction of being home to the region’s highest income tax rate and that reason is the tax cut recently voted on in the Georgia statehouse. Georgia is one of many states where lawmakers have increased their fiscal 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 brought the state’s top rate from 6% to 5.75%. In 2021 Governor Brian Kemp (R) provided more income tax relief by enacting legislation to increase the standard deduction. Now, Governor Kemp and Georgia lawmakers are advancing legislation this year that will cut the state’s top income tax rate again and collapse the bottom brackets to create a flat 5.25% income tax.

The Georgia House of Representatives passed that income tax cut on March 9 with 115-52 vote. The state senate is expected to follow suit, sending the income tax cut to Governor Brian Kemp’s desk sometime this spring. When asked whether Stacey Abrams, the Democratic nominee running to take Governor Kemp’s job from him, is supportive of the income tax cut recently approved by the Georgia House, Abrams’ campaign declined to comment.

A similar dynamic from Abrams’ first bid for governor four years ago is once again in play. During that campaign in 2018, the Georgia Legislature passed the aforementioned income tax cut that was ultimately signed into law by then-Governor Deal. After initially opposing and speaking out against that income tax cut, Abrams later clarified her opposition to note that she would not seek to repeal that income tax cut if elected governor.

On March 4, Kentucky joined the list of states looking to become the nation’s 10th no-income-tax state when the state’s House of Representatives passed House Bill 8, legislation that will cut the state income tax from 5% to 4% next year. HB 8 will also schedule the state income tax to phase out completely over time, provided that specified revenue targets are met in the coming years.

“We are competing with 49 other states in truly a global economy, and tax policy moves people,” said Kentucky Representative Steven Rudy (R-Paducah), explaining the motivation to provide tax relief and ultimately eliminate the 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 particularly imperative for Kentucky lawmakers to look for ways to make their tax code more competitive and less burdensome. The income tax phaseout bill passed by the Kentucky House now goes to the state senate for consideration. The legislative session is scheduled to adjourn in mid-April.

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

“We can throw out the welcome mat for the dreamers and the visionaries,” Governor Tate Reeves (R) said of the prospect of Mississippi becoming a no-income-tax state. “We can have more money circulating in our economy. And it can lead to more wealth for all Mississippians.”

The ball is now back in the Mississippi Senate’s court, where members are not as keen to phase out the state income tax as the House of Representatives and Governor Reeves are. The legislative session in Mississippi is scheduled to end in April and there is a chance that this issue will get punted 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 legislators approved a bill on March 9, the final day of the 2022 legislative session, that will reduce the Hoosier State’s flat income tax rate from 3.23% to 2.9% over the next seven years. On March 1, Iowa Governor Kim Reynolds (R) signed a bill to cut her state’s income tax down to a flat 3.9% over the next four years. The changes enacted by Governor Reynolds and Iowa legislators significantly reform and simplify the state income tax code, which currently consists of nine different brackets with a top rate of 8.53%. That move by Reynolds in Iowa came a few weeks after Idaho Governor Brad Little signed into law the first state income tax cut of 2022, which was the largest in Idaho’s history. Shortly after Idaho lawmakers enacted the first state income tax cut of the year, Utah lawmakers followed suit.

Idaho and Utah might not be the only states in the Mountain West where taxpayers receive an income tax cut in 2022. On March 16, a ballot measure was filed with the Colorado Secretary of State that will, if it is approved by voters this November, reduce Colorado’s flat income tax rate from 4.55% to 4.40%. Colorado voters cut the state income tax from 4.63% to 4.55% in 2020 by approving Proposition 116. Legislation to cut the state income tax was recently defeated in committee. Though the Democratic-controlled Colorado House and Senate appear unwilling to pass income tax relief, voters will now get the opportunity to do it themselves.

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

The income tax cut put before Colorado voters in 2020 was opposed by Democratic leaders in the state legislature, but was supported by Governor Jared Polis (D). It will be interesting to see if Governor Polis bucks his party again by supporting the new income tax cut this November. Governor Polis’s 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 response from the Governor’s office if one is provided.