Residents Of These Five States Are Weeks Away From Getting An Income Tax Cut

Millions of Americans will see their state government take a smaller bite out of paychecks when 2023 begins in a few weeks. That’s because, when the Waterford Crystal ball comes down in Times Square to close 2022, income tax rate reductions will take effect in a handful of states.

North Carolina’s 4.99% personal income tax will fall to 4.75% on January 1, 2023. Though that reduction may sound modest to some, it sets the state income tax rate — which, along with individuals and families, is paid by most small businesses — nearly 38% lower than the top rate levied in 2013.

On New Year’s Day one decade ago North Carolina had the highest personal income tax rate in the southeastern U.S., with a top rate at the time of 7.75% coupled with a 6.9% corporate income tax. Thanks to reforms enacted under the leadership of Senate President Pro Tempore Phil Berger (R) and Speaker Tim Moore (R), by the end of 2026 North Carolina’s corporate income tax will completely phase out and the personal income tax rate will drop to 3.99%.

By making the tax code less burdensome and more competitive over the past decade, but doing so in a responsible manner that did not lead to budget deficits, the tax policy changes implemented in North Carolina have been viewed by governors and lawmakers in other states as a model for pro-growth tax reform. Though Democratic politicians, progressive pundits, and some media outlets have repeatedly tried to portray Kansas and the tax code changes enacted there in 2012 as the epitome of conservative tax reform, conservatives themselves have been pointing to North Carolina, not Kansas, as the model for how to do tax reform the right way.

In fact, some of the states whose legislative leaders have followed North Carolina’s example have since surpassed the Tar Heel State when it comes to income tax rate reduction. Take Arizona, one of the five states where an income tax cut takes effect at the beginning of 2023. Arizona currently has a progressive income tax structure with a top rate of 4.5%, but a new 2.5% flat income tax will take effect on January 1, 2023.

While North Carolina’s new 4.75% income tax rate marks a signifiant reduction from where the Tar Heel State’s income tax rate had been only a few years prior, Arizona’s new 2.5% is far less burdensome than the 8.0% income tax rate that was scheduled to be in place by now. Proposition 208, a ballot measure approved in 2020, would’ve created a new 8.0% top rate in Arizona by imposing a 3.5% surtax on upper income households to be levied on top of the state’s current 4.5% top rate.

Governor Doug Ducey (R) and Arizona legislators subsequently passed legislation in 2021 that effectively blocked the imposition of the Proposition 208 tax hike. In the process, Ducey and lawmakers passed legislation to cut the state’s income tax rate down to a flat 2.5%, with that reduction contingent upon revenue collections hitting certain levels. In September, it was announced that revenue triggers had been hit earlier than anticipated and that the 2.5% income tax rate expected to start in 2024 would take effect one year ahead of schedule.

“It’s time to deliver lasting tax relief to Arizona families and small businesses so they can keep more of their hard-earned money,” Governor Ducey wrote in a letter to Arizona Department of Revenue Director Robert Woods on September 29. “This tax relief keeps Arizona competitive and preserves our reputation as a jobs magnet and generator of opportunity.”

Income tax cuts take effect in a couple other states at the start of 2023. Idaho has a progressive income tax with a top rate of 6.0%. Thanks to legislation signed in September by Governor Brad Little (R), a flat 5.8% income tax rate will take effect on January 3, 2023.

Iowa Governor Kim Reynolds (R) signed legislation in March moving Iowa to a flat income tax. As part of that reform package, on January 1 Iowa will go from having nine income tax brackets with a top rate of 8.53%, to four brackets with a top rate of 6.5%. By 2026, Iowa will levy a flat, 3.9% income tax. The reform package signed by Governor Reynolds also brings Iowa’s corporate rate from 9.8% down to 5.5%.

In Mississippi, the 4.0% income tax bracket, which is the lower of the state’s two income tax brackets, will be repealed on January 1, leaving Mississippi with a flat 5.0% income tax that excludes the first $10,000 in income. Governor Tate Reeves (R) recently reiterated his ultimate goal is to completely repeal Mississippi’s income tax.

“You don’t have to be a geography expert to look at a map and recognize that we have Texas to our west, Florida to our east and Tennessee to the north,” Governor Reeves said to business leaders at an October event hosted by the Mississippi Chamber of Commerce. “All three of those states have no income tax, and therefore all three of those states have a competitive advantage when we are recruiting for both businesses and individual talent.”

Interstate migration data suggests income tax rate reduction helps states become more attractive to new residents. In her analysis of IRS migration data from 2019 to 2020, the Tax Foundation’s Katherine Loughead noted that tax rates and other cost-of-living factors “may not be the primary reason for an interstate move, but they are often one of several factors people consider when deciding whether—and where—to move.”

“Overall, states with lower taxes and sound tax structures experienced stronger inbound migration than states with higher taxes and more burdensome structures,” Loughead added. “Of the 10 states that experienced the largest gains in income taxpayers, five do not levy individual income taxes on wage or salary income at all, and two others had top marginal individual income tax rates that were below the national median at the time…Nine of the top 10 states either forgo individual income taxes on wage and salary income, have a flat income tax, or are moving to a flat income tax.”

People will be celebrating the end of 2022 and the beginning of 2023 all over the world in a few weeks. But residents of North Carolina, Arizona, Mississippi, Idaho, and Iowa will have an extra reason to get festive on December 31, one that will mean higher take home pay throughout the new year and those that come after.