State Tax Cuts a Trend Nationwide

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The United States has been experiencing a “tax cut fever” among states. States with large surpluses are cutting taxes rapidly. Although some states have given one-time refund checks, many red states have opted for permanent tax rate decreases.

This has been the mentality among states for the last three years. But how much are these taxes decreasing, and will this trend last?

48 States Lower Taxes

From 2021 to January 2024, 48 states and the District of Columbia have either cut taxes or given rebates. The two that haven’t reduced taxes are Alaska and Nevada. But, in fairness, neither Alaska nor Nevada has a personal income tax.

This equates to billions of dollars saved by taxpayers. Some taxpayers have received rebates, but others, like Missouri, will enjoy tax savings over many years.

Tax cuts were due to a mix of a (previously) booming stock market, federal pandemic-related spending, consumer spending and different aspects of the post-COVID economy. This increased economic growth.

Sixteen states passed tax cuts in the three years between 2021 through 2024. At the same time, 32 states passed significant tax cuts in two of the last three years. Nearly every state had some tax cut from all regions of the United States.

Political parties didn’t matter. For example, Democrat-controlled Oregon as well as Republican-controlled Georgia passed tax cuts over the past three years.

Politically divided governments in Kansas, Kentucky, Maryland, and Wisconsin each passed tax cuts in multiple years.

But why the change in these state’s fiscal policies.

States Experiencing Budget Surpluses

Many states are experiencing budget surpluses. For example, Republican-led Missouri experienced a healthy surplus. With an $8 billion surplus, they enacted sweeping changes to their personal income tax rates.

Many states ended fiscal 2023 with budget surpluses. Tax collections had come in above projections. After double-digit growth, many states assumed there would be smaller revenue levels.

In fiscal 2021, revenue collections grew at a record high of 16.6 percent. While in 2022, they grew 16.3 percent. The projection was that there would be a 3.1 percent decline in 2023. But that didn’t happen. Instead, in fiscal 2023, there was a 0.3 percent decline in tax collections. This continued to sustain many states’ surpluses.

Personal Income Tax Lowered by Many States

Not all cuts were for personal income taxes. In 2023, 11 states reduced individual income taxes. Twelve reduced them in 2022, and nine cut personal income taxes in 2023.

Several states reduced individual income taxes multiple times. For example, Iowa cut tax rates in 2021 and 2022.

Some states expanded tax credits. Over three years, 25 states expanded the earned income tax credit or the child tax credit.

Although political control didn’t affect tax cuts, it did affect the types of tax cuts enacted.

Personal income tax cuts primarily came from Republican-led states. Seventeen of the 23 states that cut individual income tax rates were Republican. In other words, roughly 73 percent of the individual income tax cuts were passed by Republican-led states.

Many Democrat-led states with surpluses gave tax rebates instead of tax cuts.

The trend carried over to states that are economically challenged. Kentucky, with the 43rd-ranked economy in the United States, passed sweeping tax cuts. Ranked 47th and led by Republican Governor Jim Justice, West Virginia also enacted tax cuts that would eventually eliminate the state’s personal income tax.

Corporate Income Tax Lowered

Corporate tax relief has gained momentum on a bipartisan level. Initially seen as a tax on the wealthy, the tax also cost employees and customers through lower pay and higher prices.

It’s been a decade since federal scorekeepers realized who bore the corporate tax burden. This spurred corporate tax cuts both for the states and the federal government.

The result is that red, blue and purple states have adopted more friendly corporate taxation.

Several states have enacted corporate income tax cuts. For example, North Carolina in the midst of phasing out corporate taxes by 2030. At the current 2.5 percent, it has the lowest corporate tax rate in the nation. This refers to the tax rate since three states don’t have a corporate tax.

Following the trend, in 2023, states like Utah and Nebraska enacted corporate tax reductions. Led by Governor Sarah Huckabee Sanders, Arkansas lawmakers also reduced the corporate tax rate.

Tax Cut Wave Across US

Although the economy is still limping along, state tax cuts are helping many Americans. The question is whether this will help or hurt states in the long run. With lower income and corporate taxes comes less tax revenue.

But with many states leaving sales taxes relatively untouched, Americans with extra cash in their pockets may spend their surplus.

Lower corporate taxes will also ignite more investment in states that have been struggling economically.

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