Across the Nation
States Embrace Tax Reform, Challenging Personal Income Tax
In states across the nation, a call for tax reform is challenging the notion of personal income tax.
A number of states have introduced or passed tax changes that would shift revenue collections from income taxes to sales and use taxes. This shift is creating a debate on taxing priorities and how best to serve taxpayers. Here’s a look at the reform happening in five different states.
Georgia has the 19th highest personal state income tax rate at 6 percent, according to the Tax Foundation. Pressured to introduce significant tax reform because of low personal taxes in neighboring Alabama, Florida, and Tennessee, Georgia became the first state to pass a ballot measure that caps the maximum income tax rate. Passed by a 75 percent majority in 2014, the measure establishes a maximum possible tax rate of 6 percent to all future tax policy legislation.
With revenue projections off by more than $200 million for 2015 and a budget gap totaling $600 million in the state, Governor Sam Brownback is appearing to backtrack from his 2012 tax cuts.
Brownback’s 2012 tax reform package, which he called a “real live experiment” in supply-side economics, cut personal income tax rates across the board and eliminated income taxes from sole proprietorships whose income would be claimed on the owner’s personal income tax returns.
In January, Brownback requested that the state legislature slow the implementation of his tax cut package, according to the New York Times, canceling the planned lowering of the top rate from 4.6 percent to 3.9 percent in 2018. He also called to increase sales taxes on liquor and tobacco products, and reduce itemized deduction increases that were slated to begin in 2017.
In 2014, Oklahoma passed an across-the-board income tax cut that plans to lower the top rate of 5.25 percent to 4.85 percent by 2018. These tax cuts are not automatic, however; the legislation created a trigger that will only enforce the cuts should estimates suggest that state tax revenue will continue to rise. For example, a top rate drop from 5.25 percent to 5 percent for 2016 would only occur if the state predicts enough money to pay for it.
During his first term, Ohio Governor John Kasich eliminated the state estate tax and reduced personal and small business income taxes to the tune of $3 billion in savings. In February, Kasich proposed a moderate plan introducing $500 million more in cuts, including a 23 percent cut in personal tax rates across the board by 2016, an increase in the state income tax personal exemption for anyone making less than $80,000 a year, and increases in the cigarette and commercial activities taxes. The plan would also fix or lower taxes on crude oil and natural gas.
In 2013, Republicans took control of North Carolina’s legislative and executive branches for the first time since the end of the Civil War. They quickly reformed the tax code, creating a flat tax system with a single income tax rate, fewer credits, an elimination of the personal exemption, a larger standard deduction, no estate tax, and a $50,000 small-business-owner deduction. The state corporate income tax rate was also dropped from 6.9 percent to 5 percent in 2015, with a 3 percent rate possible if revenue targets are met, and the local privilege tax, a locally-assessed tax on various firms, was eliminated.
Overall, arguments against these tax reforms posit that they would benefit the wealthy while forcing the working class to pay more for basic amenities. Proponents argue, however, that reducing or eliminating income tax could shift the way people handle their money, creating a natural encouragement to save and invest. One thing is clear, change is in the air across state lines.