2023 Poised To Be A Third Straight Year Filled With State Tax Relief

Wealth tax legislation introduced in multiple state capitals in late January is noteworthy not only because of the unprecedented and coordinated nature of the effort, but also because it accentuates the contrasting approach to fiscal policy taken by lawmakers in blue and red states. While legislators in California, Connecticut, Hawaii, Illinois, Maryland, New York, and Washington are pursuing first-of-its-kind wealth tax legislation, their counterparts in red states have proposed and are poised to pass more income tax rate-reducing, flattening, and eliminating tax reform in 2023.

Perhaps the boldest tax reform proposal of the year is now under consideration in Wisconsin, where Senate Majority Leader Devin LeMahieu (R) has introduced legislation to overhaul the state tax code. Leader LeMahieu’s bill would move Wisconsin from a progressive income tax code with a top rate of 7.65% to a flat 3.25% income tax rate. The 3.25% flat rate, which is lower than Wisconsin’s current bottom rate of 3.54%, would result in a tax cut, on average, for every income level. In a recent interview with the Badger Institute’s Mike Nichols, Leader LeMahieu expressed optimism that his counterparts in the Assembly will get on board with income tax relief, even if it doesn’t end up exactly as he proposed:

“I think the Speaker understands that, when we do tax reform, this might not be his preferred method,” Senator LeMahieu told Nichols. “But he understands that we need to touch the top tax bracket, top income tax bracket. We can’t just leave it up there, that we need to be more competitive.”

Senator LeMahieu highlights how his flat tax proposal, like income tax cuts enacted other states, would also provide relief to employers, not just individuals and families. In his interview with Nichols, LeMahieu pointed out “that the vast majority of business in Wisconsin are personally owned, family-owned businesses, which operate as pass-throughs who pay (individual) income taxes”

If Leader LeMahieu’s proposal or a modified version of it is enacted, Wisconsin will become the sixth state where a flat tax has been adopted in the past two years alone. A decade ago North Carolina became only the third state ever where lawmakers have passed legislation to move to a flat tax (five states have always had a flat income tax, so North Carolina became the eighth flat tax state with its adoption). Since then, legislators in six more states enacted reforms to move from a progressive to a flat income tax, bringing the number of flat tax states to 14. When subtracting Massachusetts, where voters adopted a progressive income tax last year, there are now 13 states that have a flat tax or have a law on the books phasing one in over the next few years.

New Hampshire’s investment income tax is scheduled to phase out at the end of 2026, though legislation is now under consideration to eliminate that tax at the end of 2023. When that happens, New Hampshire will become the ninth no-income-tax state. That will bring the number of states with no income tax or a flat income tax to 22. Enactment of Leader LaMahieu’s bill or some version of it would make Wisconsin number 23. Significant income tax rate reducing legislation is now pending and likely to pass in other states this year.

While on the campaign trail last year, Arkansas Governor Sarah Sanders (R) announced that her goal is to eliminate the state income tax. As her first term commences, Governor Sanders has a great deal of political capital to spend and the Governor has signaled she intends to deploy it for the purposes of expanding school choice and providing tax relief that makes the Arkansas tax code more competitive.

Legislation that would make progress toward Governor Sanders’ goal has been filed by Representative David Ray (R). Representative Ray’s bill, House Bill 1097, would cut the top personal income tax from 4.9% to 4.5%.

Income tax cuts were enacted in more than 20 states over the past two years. West Virginia wasn’t one of those states, but Governor Jim Justice (R) and West Virginia legislators are now seeking to get in the game when it comes to passing income tax rate-reducing tax reform.

Legislation passed out of the West Virginia House of Delegates on January 18 that would cut the state’s top income tax rate by nearly 50%, bringing it from 6.5% down to 4.55%. Governor Justice has made clear that income tax relief is a high priority for him. If an income tax cut makes it to Governor Justice’s desk this year, he’ll have followed through on one of his top commitments to West Virginians. Enactment of income tax relief in 2023 will also give Governor Justice a major achievement to tout on the 2024 campaign trail, should he run against Senator Joe Manchin (D), something Justice recently said he’s leaning toward doing.

Even in states that have already enacted tax relief or have a relatively low tax burden, legislators are still proposing further relief in 2023. In North Carolina, for example, Senate President Pro Tempore Phil Berger (R) recently said that he’d like to see the Tar Heel State get down to a 2.5% income tax rate, the same rate that took effect in Arizona on January 1 and is now the lowest flat tax rate in the nation. North Carolina Senate Majority Leader Paul Newton (R), who co-chairs the Senate Finance Committee, is also a champion of further income tax rate reduction.

North Carolina’s flat income tax fell from 4.99% to 4.75% on January 1 and is schedule to fall to 3.99% at the end of 2026. There is now talk in the North Carolina General Assembly, which recently convened a new session, about speeding up the phase down to 3.99% and possibly scheduling out additional rate reduction, as Senators Berger and Newton have suggested. Republicans now have a veto-proof majority in the North Carolina Senate, but one Democratic vote is needed to override a veto in the House. That said, Speaker Tim Moore (R) and others have expressed optimism that they’ll be able to get Democratic support for fiscal reform such as income tax relief.

Not only have Speaker Moore and Senate President Pro Tempore Berger already proven they can get Democratic votes for tax cuts, so too have their counterparts in other red states. The flat tax legislation adopted in Georgia last year, for example, received support from most Democratic legislators. Every Democrat in the South Carolina House and Senate voted for the income tax cut passed in 2022, which was the first income tax cut in the Palmetto State’s history. Meanwhile last year in Mississippi, every Democrat in the House voted in favor of full income tax repeal. The take away for many is that while legislation to impose new or higher taxes is being introduced in blue states where Democrats control state government, many Democratic lawmakers in red and purple states have displayed an inclination to support rate-reducing, flattening, and evening repealing tax reform.

It’s too early to make predictions on the likelihood than any of the seven wealth tax bills introduced in January will end up passing. Many suspect these are messaging bills that the sponsors don’t expect to pass, even in states where Republicans have no power to stop anything. New wealth tax legislation introduced in California, for example, is a retread of a wealth tax bill introduced in 2020. That previous wealth tax bill, like single-payer health care legislation introduced in California, passed out of the Assembly and then died in the Democratic-controlled Senate.

It’s no secret that wealth taxes come with negative unintended consequences that prevent them from serving as a reliable source of revenue. French President Emmanuel Macron’s explanation about why he repealed France’s wealth tax in 2017 serves as a cautionary tale for blue state legislators considering wealth tax legislation in 2023:

“My predecessor taxed the wealthiest and those who succeeded like never before,” Macron said. “What happened? They left.”

The enactment of income tax relief in states across the country, a trend that has strengthened over the past decade, has changed what it means to have a competitive tax code and hospitable tax climate. In 2010, the median top income tax rate was 6.00%. Today, it is 5.00%.

This downward trend in median state tax rates and the legislation that made it happen is why many view the current period as a golden era for state tax competition. More states are getting in on the income tax cutting action in 2023 and even lawmakers in states that have already passed significant rate reduction, like North Carolina and New Hampshire, realize that resting on their laurels is not a good idea. To stand still in 2023 when it comes to improving a state’s tax code, many legislators have concluded, is to be left behind.