Red states are set to give Americans tax breaks starting in 2023.
Multiple states have changes going into effect dropping personal or business taxes.
With state legislatures entering their third sessions since the 2020 pandemic pumped trillions in federal recovery and stimulus assistance into state and local government coffers, tax reform across a range of levies is among front-burner priorities for lawmakers in 2023.
During 2022 sessions, Washington, D.C.-based Tax Foundation reports at least 38 states adopted “noteworthy tax changes” with most going into effect on Jan. 1, including trims in personal income tax rates in 11 states and flat income tax structures being implemented in three states, Arizona, Idaho, and Mississippi on New Year’s Day.
The Tax Foundation, Council On State Taxation, and Institute on Taxation and Economic Policy put together a list of changes going into effect in 2023.
(Republicans currently control all of the state legislatures and governorships in the states below)
In Alabama, the business privilege tax is dropping from a minimum payment of $100 per year to $50 per year. The first $6,000 of taxable retirement income for those over 65 will now be exempt from taxation.
Under current law, Alabama’s business privilege tax has a minimum payment of $100 per year, but that minimum will phase out as a result of H.B. 391, enacted in April 2022. Starting in 2023, the minimum tax owed will decrease from $100 to $50. Beginning in 2024, businesses with a liability of $100 or less will no longer be required to remit a business privilege tax payment.
Separately, under H.B. 162, enacted in April 2022 and beginning in 2023, Alabama will exempt the first $6,000 of otherwise taxable retirement income for those 65 or older. Click here to return to top.
Arizona is getting a flat tax.
The two-bracket structure will now be a flat rate of 2.5%.
On January 1, Arizona will join the growing list of states with a flat individual income tax structure, one year earlier than originally anticipated. Under S.B. 1828, enacted in June 2021, Arizona has been in the process of consolidating its individual income tax brackets. The law established tax triggers that made the speed of the 2.5 percent flat tax phase-in contingent upon the speed at which the state reached specified revenue targets. Since Arizona reached the final revenue target sooner than anticipated, the rate schedule will convert directly from a two-bracket structure with rates of 2.55 and 2.98 percent to a flat rate of 2.5 percent, without the need for another year of a two-rate structure.
Arkansas is reducing individual and corporate income tax rates.
In August 2022, Arkansas legislators passed H.B. 1002, a bill to accelerate previously planned individual and corporate income tax rate reductions. The reduction in the top marginal individual income tax rate from 5.5 to 4.9 percent was retroactive to 2022, but the reduction in the top marginal corporate income tax rate from 5.9 to 5.3 percent takes effect on January 1, 2023.
Georgia is increasing the standard deduction for both single and joint filers.
As a result of H.B. 593, enacted in March 2021, Georgia’s standard deduction will increase from $4,600 to $5,400 for single filers and from $6,000 to $7,100 for joint filers.
Idaho is moving to a flat individual tax structure.
Under H.B. 1, enacted in September 2022, Idaho will move to a flat individual income tax structure at a rate of 5.8 percent, down from the current top marginal rate of 6 percent. As this law was designed in part to supersede a tax increase proposal that was approved for the ballot but later withdrawn, the law technically takes effect January 3, 2023, but its provisions apply retroactively to January 1, 2023, and we have elected to include it in this update.
Indiana is reducing its flat tax rate.
Under H.B. 1002, enacted in March 2022, Indiana’s flat individual income tax rate will be reduced from 3.23 to 3.15 percent effective for 2023 and 2024, with triggers in place that could reduce the rate to 2.9 percent by 2029 if specified conditions are met.
Additionally, under H.B. 1260, enacted in March 2022, Indiana’s $3,000 mortgage deduction will be repealed, while the property tax homestead deduction will increase by $3,000, allowing taxpayers to deduct the lesser of 60 percent of the assessed value of the property or $48,000 (up from $45,000) in 2022. Additionally, senior citizens may claim a tax deduction on homes valued up to $240,000 (up from $200,000) in 2022.
Iowa is consolidating its nine-income tax bracket system to just four and decreasing the top rate. Retirement income and farm rental income will be exempt from taxation.
Iowa enacted comprehensive tax reforms in 2018, 2021, and 2022, and many of these reforms will continue phasing in with the new year. Most notably, effective January 1, Iowa’s nine individual income tax rates will be consolidated into four, and the top rate will decrease from 8.53 to 6 percent. (Iowa’s graduated-rate tax structure is scheduled to shift to a flat tax at a rate of 3.9 percent in 2026.) The individual alternative minimum tax rate will be set at 6 percent for 2023 and will phase down over time. In addition, starting in 2023, the standard deduction and state deduction for federal taxes paid will be repealed, broadening the base to help pay for reductions to the rate. Iowa will also exempt retirement income and certain farm rental income from taxation beginning January 1, and phase out its inheritance tax by 2025, with a further reduction in rates taking effect on January 1.
Mississippi is going to a flat tax system and raising the amount for what is considered taxable income.
Mississippi will move to a flat individual income tax structure as a result of H.B. 531, enacted in April 2022. Effective January 1, 2023, the current 4 percent tax on taxable income between $5,000 and $10,000 will be eliminated, leaving a single rate of 5 percent on income exceeding $10,000. The flat rate will then phase down to 4.7 percent in 2024, 4.4 percent in 2025, and 4.0 percent in 2026.
Missouri raised the amount of income that is exempt and reduced its top marginal income tax rate.
In October 2022, Missouri legislators passed S.B. 3, a bill to expedite planned individual income tax rate reductions and replace existing tax triggers with triggers that reduce the top marginal rate further and faster than planned in previous legislation enacted in 2014 and 2021. Effective January 1, Missouri’s top marginal individual income tax rate will be reduced from 5.3 to 4.95 percent, and the amount of income that is exempt from Missouri’s individual income tax rates will increase from $100 to $1,000. Existing triggers seek to eventually reduce the top rate to 4.5 percent.
Nebraska is cutting its top individual and corporate tax rate as well as reducing the inheritance tax.
In 2022, Nebraska enacted several tax reforms that will take effect on January 1. Under L.B. 873, enacted in April 2022, Nebraska will reduce both its top marginal individual income tax rate and its top marginal corporate income tax rate to 5.84 percent by 2027. The individual income tax will be reduced by 0.2 percentage points per year, with an initial reduction from 6.84 to 6.64 percent in 2023. The top marginal corporate income tax rate will decrease from 7.5 to 7.25 percent effective January 1, as a result of L.B. 432, enacted in May 2021. The 2022 reforms also expedite a preexisting phase-in of an income tax exemption for Social Security benefits. In 2023, taxpayers may deduct 60 percent of Social Security benefits included in federal adjusted gross income (AGI), up from 40 percent in 2022. The same law also increases funding for tax credits issued under the Nebraska Property Tax Incentive Act, allocating $560.7 million for income tax credits to offset a portion of school district property taxes paid and $100 million to offset a portion of community college property taxes paid.
Separately, following the enactment of L.B. 310 in February 2022, Nebraska will reduce the inheritance tax for all classes of beneficiaries, including immediate relatives, remote relatives, and non-related individuals, by reducing rates and increasing exemptions. The lower rates and higher exemptions will apply for beneficiaries of decedents dying on or after January 1, 2023.
New Hampshire is dropping its version of the corporate income tax.
New Hampshire will begin phasing out its income tax on interest and dividends income in 2023, bringing the rate down from 5 to 4 percent. This is the result of H.B. 2, enacted in June 2021. The rate is scheduled to phase down by one percentage point per year until the tax is phased out entirely in 2027.
Separately, H.B. 1221, enacted in June 2022, reduces the Business Profits Tax (New Hampshire’s version of a corporate income tax) rate from 7.6 to 7.5 percent for taxable periods ending on or after December 31, 2023, meaning the 7.5 percent rate will apply throughout calendar year 2023.
More Red states should do the same!
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