Retroactive Red State Rate Cuts And Backdated Blue State Tax Hikes

As people across the U.S. get ready to commemorate the nation’s founding, Congress has spent the week working toward final passage of the One Big Beautiful Bill Act, legislation that will prevent all federal income tax rates from rising at the end of the year and will restore full business expensing. While avoiding federal tax hikes on more than 80% of households will come as a relief to many, Americans who reside in several states have additional reason to celebrate this Fourth of July, as they also benefit from tax cuts that took effect this week.

Many changes to state tax policy enacted this spring took effect on July 1, which is the first day of the new fiscal year in most states. In Georgia, for example, an income tax cut that Governor Brian Kemp (R-Ga.) and state legislators enacted in April took effect this week. That tax cut accelerated previously scheduled income tax rate reduction, cutting Georgia’s flat income tax rate from 5.39% to 5.19% and making that rate reduction retroactive to the first day of 2025. Governor Kemp and Georgia lawmakers plan to continue cutting the rate down to 4.99%.

“While other states are running up budget deficits and raising taxes on their citizens, we’re investing in the priorities of our state while further cutting taxes and returning more than a billion dollars to hardworking Georgians,” Governor Kemp said in his signing statement. “That’s on top of the tax relief we’ve given in prior years and is a direct result of our conservative budgeting.”

Meanwhile in Kansas, Senate Bill 269, an income tax relief package that the GOP-led Kansas Legislature enacted in April by overriding a gubernatorial veto, also took effect this week. With the enactment of SB 269, Kansas lawmakers established a mechanism to reduce the state income tax rate in the future based on revenue triggers. If the Budget Stabilization Fund balance is 15% of the prior year’s general fund, and personal and corporate income tax collections surpass an inflation-adjusted FY 2024 baseline, the personal income tax rate will drop. This will continue until the rate falls to 4%.

Once the personal income tax rate in Kansas hits 4%, the corporate income tax rate will be reduced based on the same parameters until the corporate rate falls to 4%. SB 269 also reduces the privilege tax, bringing the rate to 2.6% for banks and 2.62% for savings and loan associations. Though SB 269 took effect this week, the first opportunity for a rate cut to be triggered under the new law will be in tax year 2026.

Retroactive Tax Increases Take Effect In Maryland And Illinois

While some Americans received an income tax cut at the beginning of July backdated to January 1, some Marylanders were hit with a retroactive tax hike this week thanks to Governor Wes Moore’s (D-Md.) first budget, which took effect on July 1. That new budget raised the state income tax rate from 5.75% to 6.25% for individual earnings between $500,001 and $1 million. That rate increase also hit joint filers with income between $600,001 and $1.2 million.

Individual filers in Maryland with income exceeding $1 million and joint filers making more than $1.2 million saw their top rate rise this week from 5.75% to 6.5%. All of those rate increases were made retroactive to January 1, 2025, as was the 2% capital gains surtax also included in the budget.

While Governor Moore’s first budget imposes a multi-billion dollar net tax increase, it did provide relief to some taxpayers. That relief came in the form of standard deduction increase, raising it to $3,350 for individual filers and $6,700 for joint filers.

In addition to the budget’s retroactive income tax hikes, a 3% sales tax on data and IT services, which Maryland lawmakers imposed with the May passage of HB 352 also took effect on July 1. HB 352 also raised taxes on cannabis, car, car inspections, tires, and vending machines.

In addition to Maryland, a retroactive income tax hike also took effect this week in Illinois. Governor JB Pritzker (D-Ill.) enacted a new budget in June, which took effect on July 1, that imposed a number of retroactive changes. Among those is repeal of addback exemptions to the Section 163(j) deduction for net business interest expenses, making it less generous, and inclusion of 50% of businesses’ Global Intangible Low-Taxed Income (GILTI) into the state’s corporate income tax base.

While tax burdens rose in Maryland and Illinois this week, retroactively so, those states are outliers. Lawmakers in more than 25 states have cut state income taxes since 2020. So far in 2025, income tax cuts have been implemented in 11 states.

“All businesses operating in Illinois will now pay sales taxes, including those without a physical presence in the state,” explains Patrick Andriesen with the Illinois Policy Institute. “Business outside the state will be required to collect sales taxes if they sell at least $100,000 worth of goods or services to residents.”

In analysis published shortly after the legislature passed the budget, Andriesen outlines the other tax hikes included in the new spending package recently signed by Pritzker, which includes “a 25-cent tax on the first 20 million wagers made within the state with licensed sports betting businesses and a 50-cent tax on all wagers made thereafter.”

“Airbnb and other short-term rentals in Illinois will be taxed at the same rate as hotels under an update to The Hotel Operators’ Occupation Tax Act,” Andriesen added. “Visitors will likely now have to cover an additional 6% state tax on their short-term rental in Illinois and one of the highest tax rates in the nation when renting in Chicago.

“You would think the leaders of blue states, which have been losing population to lower-tax red states for years, would be trying to make their tax codes competitive by lowering rates for households and employers,” says Ryan Ellis, president of the Center for a Free Economy and an IRS-enrolled agent who operates a tax preparation business. “Instead, JB Pritzker and Wes Moore, both of whom are discussed in the media as future White House contenders, are doing the opposite, doubling down on the high tax blue state model that has led to declining population and, subsequently, reduced representation in Congress.”