Remainder Of 2023 To Feature Further State Income Tax Relief

Most state legislatures are out of session until 2024, but there are still several proposals pending that could result in the passage of few more state income tax cuts before 2023 comes to a close. In three of the 25 states where income tax rate reduction has been enacted over the past three years — North Carolina, Arkansas, and Wisconsin — lawmakers are taking steps this week to pass further income tax relief.

House Bill 1001, a new tax cut recently proposed by Arkansas Governor Sarah Huckabee Sanders (R), would reduce the top marginal income tax rate, which kicks in at $24,300, from 4.7% to 4.4%. The top corporate income tax rate would fall from 5.1% to 4.8% under the bill. The proposed income tax relief, if enacted, would save households and employers across Arkansas an estimated $186 million annually.

“Our employers welcome the tax rate reductions proposed by Governor Sanders,” Randy Zook, president and CEO of the Arkansas Chamber of Commerce/Associated Industries of Arkansas, said in a statement. “This will improve our competitive standing with surrounding states. As a result we will be more attractive for investment by job creators and a more compelling possibility for tax refugees from high tax states.”

A poll recently released by Opportunity Arkansas suggests most residents support further income tax relief. Among the poll’s key findings is that almost “two-thirds of all Arkansas voters support using a portion of the state’s $1.2 billion budget surplus to reduce income taxes, with widespread support across the political spectrum.”

“When given a choice of how to allocate the state’s budget surplus, Arkansas voters overwhelmingly select reducing income tax rates over other options,” Opportunity Arkansas found. The poll also discovered a “majority of Arkansas voters—by a more than two-to-one majority—support dedicating a portion of future budget surpluses to phasing out Arkansas’s state income tax.”

North Carolina Lawmakers Continue To Chip Away At Flat Income Tax

Implementation of HB 1001 would keep Arkansas’s top income tax rate slightly below North Carolina’s, another state where lawmakers have enacted multiple income tax cuts in recent years, but not for long. Demonstrating the high degree of state tax competition that exists today, North Carolina lawmakers are close to reaching an agreement on a new two-year budget that could bring the state’s flat income tax rate, which stands at 4.75%, down to or even below 3%.

The budget passed by the North Carolina Senate would phase the income tax rate down to 2.49%. The House-passed budget would accelerate already scheduled income tax relief, bringing the rate down to 3.99% faster than current law’s timetable. The final budget deal, which was expect to be unveiled this week, will include some amount of additional income tax relief and the question is how much.

Wisconsin Governor Threatens To Veto New Income Tax Cut

Wisconsin is another state where, as in North Carolina, Republicans control the legislature while a Democrat resides in the governor’s mansion. Also like North Carolina, the GOP-run legislature in Wisconsin has enacted income tax relief in recent years and is seeking to pass further rate reduction this week.

Legislation passed out of the Wisconsin Assembly yesterday, AB 386, would cut the state’s second highest income tax rate from 5.3% to 4.4%. Governor Tony Evers (D), who vetoed income tax relief passed by the Wisconsin Assembly and Senate earlier this year, has already issued a veto threat against the Assembly-approved tax cut. The rate cut passed by the Assembly this week would provide relief to most Wisconsin taxpayers, as the reduced rate applies to income between $27,630 and $304,170 for individuals and between $18,420 and $405,550 for joint filers.

The Wisconsin Assembly also voted yesterday on a constitutional amendment, Assembly Joint Resolution 66, to require a two-thirds supermajority vote in the legislature to raise taxes. 16 states have a super-majority requirement on the books to raise taxes, the most recent of which was approved by Florida voters in 2018.

After passing out of the Assembly by a 64 to 35 vote on September 12, the amendment goes to the state Senate for consideration. The measure will need to be passed by both chambers of the legislature in consecutive years and then approved by Wisconsin voters in order to become law.

While Governor Evers has promised to veto the new tax cut approved by the Assembly this week, his Democratic counterpart across the Lake Michigan, Governor Gretchen Whitmer (D-Mich.) is unable to stop an income tax cut that will definitely take effect in Michigan this year thanks to revenue trigger-enabled tax reform enacted in 2015. Earlier this year the Michigan Treasurer announced the state income tax rate will fall from 4.25% to 4.05% this year in accordance with tax reform enacted in 2015, which scheduled a series of rate reductions to take effect based on certain revenue triggers being met.

“Broadly, a reduction is triggered when the rate of growth of the general fund in the previous fiscal year exceeds the rate of inflation for the same period, but only if the inflation rate was positive,” the Tax Foundation’s Manish Bhatt writes about Michigan’s revenue trigger. “The size of the reduction is calculated using a formula detailed in the statute.”

There is a coming debate in this 2024 battleground state over the duration of the recently-triggered income tax cut. Michigan Attorney General Dana Nessel (D) issued an opinion in March, one backed by Governor Whitmer, contending the income tax rate cut is only supposed to last one year, with the rate ratcheting back up to 4.25% in the subsequent tax year. Republican legislators in Michigan contend that was not the intention of the 2015 tax act and that the letter of the law does not support Democrats’ claims that the income tax cut is supposed to expire after a year.

“When we debated passing the tax cut trigger in committee hearings and on the floor, it was perfectly clear to everyone there that the reduction was meant to be permanent,” Representative Dale Zorn (R) said in an August statement. Representative Zorn is a plaintiff in a lawsuit filed in August seeking to ensure the income tax cut is not undone after one year without a vote.

While a revenue trigger-facilitated tax cut takes effect in Michigan this year, in Kentucky the state budget director recently announced that revenue triggers enacted in Kentucky in 2022 were not met this year, meaning that after two income tax cuts over the past two years, an income tax rate cut will not take effect in Kentucky for a third consecutive year. Kentucky lawmakers say this shows revenue triggers are working as designed, ensuring income tax rate reduction doesn’t result in budget deficits. Senator Chris McDaniel (R), who chairs the Kentucky Senate Appropriations and Revenue Committee, told the Kentucky Lantern on August 31 that he views this development as example of “successful implementation of policy.”

The next income tax rate reduction included in North Carolina’s coming budget might also be contingent upon certain revenue triggers being meet in the coming decade. That will be known once the budget agreement is released, which many had expected to occur this week, but is now reported to be further delayed, with a vote possibly not happening until next month. It’s been another banner year for state income tax relief already and proponents of rate-reducing tax reform might notch a couple more victories in these final months of 2023.