States Continue To Take Steps Toward Income Tax Elimination

Aside from death and taxes, the third certainty in life, at least in 2022, is that states are going to enact income tax relief. That was predicted in this space several weeks ago and is exactly what has since transpired, with a handful of new state income tax cuts reaching governors’ desks in recent days. Even lawmakers in states that don’t have an income tax are finding ways to provide further tax relief to their constituents in 2022.

Take Tennessee, one of the nine states with no income tax. Despite already being part of the no-income-tax club and boasting the nation’s third lowest overall tax burden, Volunteer State legislators are about to enact more tax relief. House Bill 519 & Senate Bill 884, legislation which has nearly 90 co-sponsors, would repeal Tennessee professional privilege tax, a levy that has been referred to as the last vestige on an income tax in Tennessee.

Tennessee’s professional privilege tax was enacted in 1992. In 2004 the annual levy was increased to $400 and expanded to cover 23 professions. During the 2019 session, Governor Bill Lee (R) and state legislators repealed the professional privilege tax for all but seven professions (attorneys, securities agents, broker dealers, investment advisers, lobbyists, osteopathic physicians, and other physicians). Many would like to see Tennessee lawmakers finish the job started three years ago by repealing the remainder of this tax this year.

Jim Brown, who leads the National Federation of Independent Business’s Tennessee chapter, explained in a column published in the April 4 edition of The Tennessean that the professional privilege tax “is not only discriminatory but also constitutionally suspect. It likely violates the uniformity clause in Article 2, Section 28 of the state constitution, as well as due process.” Brown goes on to point out that “professionals who already pay licensing fees are essentially being double-taxed as they must also pay the tax annually – even when they conduct no business and just to maintain their licenses.”

In what is maybe the one area in which Tennessee would want to take fiscal policy cues from Alabama, Governor Kay Ivey (R-Ala.) signed House Bill 391 into law on April 6. This reform will phase out Alabama’s professional privilege tax, which was first enacted in 1972, by 2024. Proponents of HB 391 tout that it will provide tax relief for 230,000 small businesses.

“Alabama’s small businesses are the soul of our economy, and as long as I am your governor, I will continue to be a champion for these hardworking men and women,” said Governor Ivey. Supporters of the tax cut point out that the state is more than able to afford such tax relief at this time. “The budgets allow that right now, both the general fund budget and the trust fund budget,” said Senator Tom Butler (R). “We are in very good shape.”

“It is just something that is a hindrance to growing businesses in the state,” said Senator Butler of the impetus to repeal the professional privilege tax. “This does not affect municipal and county taxes but it does send a message that the state is ready to do business without charging them the minimum tax to do it.”

Many in Tennessee hope that they will soon follow suit. Aside from Tennessee and Alabama, only four other states levy a professional privilege tax (Connecticut, Delaware, Montana, and North Carolina).

The day before Governor Ivey signed legislation to repeal her state’s professional privilege tax, her counterpart next-door in Mississippi, Governor Tate Reeves (R), signed a bill that will reduce the Magnolia State’s income tax and make it flat by repealing the bottom bracket. Governor Reeves and legislative leadership have already made clear they intend to continue efforts to fully phase out the state income tax.

“The deal agreed to by the House and Senate is a $500M+ tax cut,” Governor Reeves tweeted about the compromise tax cut, which did not go as far as he and the Mississippi House, which voted unanimously for full income tax repeal, had hoped. “That’s good. I still believe we can and should eliminate the income tax. The fiscal environment is right. Sadly, the political environment in the MS Senate is not.”

“Full elimination is the goal, it is still our goal. Taking this deal today does not forgo our goal of total elimination, but it is the largest tax cut in the history of our state,” said Mississippi House Speaker Philip Gunn. “It provides significant, real relief to our citizens.”

The day before Governor Reeves signed that income tax cut into law, Georgia legislators finished their 2022 legislative session by sending an income tax cut to Governor Brian Kemp’s (R) desk. Not only does that reform reduce Georgia’s income tax rate, like the plan approved by Reeves it flattens it.

“It’s simple, fair, and it allows hardworking Georgians to keep more of their hard-earned money,” Representative Shaw Blackmon (R), Chairman of the Georgia House Ways and Means Committee, said of the income tax cut, which was approved with broad bipartisan support, passing out of the Georgia House by a 162-2 vote and out of the Senate with a 41 – 13 majority.

“Many of my caucus colleagues voted no on this bill, but once the bill was improved, many of us are voting yes to give Georgians back hard-earned money,” said House Minority Whip David Wilkerson (D), explaining why nearly his entire caucus voted for the new flat tax.

Georgia currently imposes a top income tax rate of 5.75%, with five lower rates and brackets below that. Under the tax reform plan that passed this week, Georgia will move to a flat 5.49% income tax starting in 2024, with the rate phased down gradually until it reaches 4.99%, the same rate North Carolina’s flat income tax dropped down to at the beginning of 2022. To address concerns about potential future revenue shortfalls, the income tax rate phase down will pause if annual revenue collection growth in Georgia falls below 3%.

Shortly before lawmakers in Georgia and Mississippi approved their new income tax cuts, their counterparts in the Kentucky Legislature did the same by passing House Bill 8. Under HB 8, which was sent to Governor Andy Beshear’s (D) desk on March 30, Kentucky’s flat income tax will drop from 5% to 4.5% at the beginning of 2023. Proponents of the tax package point out that it could set the Bluegrass State up to be rid of its income tax in the not too distant future, possibly the next eight to ten years.

“We do firmly believe in lowering the income tax rate in the state, but it has to be done responsibly,” said Senator Chris McDaniel (R), who chairs the Kentucky Senate Appropriations & Revenue Committee. “And this is a very gradual way to accomplish that safely.”

If Governor Beshear decides to sign HB 8, he would not be the first Democratic governor to approve an income tax cut recently. Louisiana Governor John Bel Edwards (D) and Wisconsin Governor Tony Evers (D) have approved income tax cuts passed by Republican-run legislatures in the past year. The tax package enacted by Governor Edwards could even lead to the full elimination of Louisiana’s income tax and the budget signed by Governor Roy Cooper last year will phase out North Carolina’s corporate income tax entirely over the next decade.

While 14 states enacted income tax relief in 2021, 2022 is shaping up to be a historic year for tax reform. Not only is state income tax relief continuing to be enacted with bipartisan support, we could see as many as four states move from graduated to flat income tax rates this year. Jared Walczak, vice president of state projects at the Tax Foundation, recently wrote that “we might well see as many states adopt laws transitioning from graduated to flat-rate income taxes in 2022 as we have seen in the entire history of state income taxes to date.”

While the trend of bipartisan state income tax cuts has continued apace into 2022, don’t expect it to abate after the midterm elections. Leading legislators in many states are already planning and crafting tax reform packages for 2023. How far states are able to go in the coming years and how many more are able to join the flat or no-income-tax club will depend on what happens this November.