Is Your State’s Tax Policy Going Flat? Discover What It Means for You!
The Tax Foundation
As the new year dawns, 39 states are taking bold strides with fresh tax laws, showcasing a dynamic blend of tax cuts, taxpayer rebates, and a noticeable shift away from traditional progressive tax systems toward simplified flat rates.
With the recent moves from Iowa and Louisiana, the wave of flat income tax systems is gaining momentum, now encompassing 14 states. This trend highlights a significant shift in fiscal policy that could reshape financial landscapes across the nation.
Moreover, discussions around completely eliminating income tax are heating up in various states, although there remains a cautious approach regarding the revenue solutions needed to make this a reality.
This insight aligns with a comprehensive analysis of state tax law modifications, prepared by a respected non-partisan think tank, recognized for its expertise in tax policy.
As we step into the new year, nine states—Indiana, Iowa, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, and West Virginia—are set to lower individual income tax rates. Notably, South Carolina is solidifying a temporary reduction into a permanent fixture.
For instance, Iowa has slashed its rate from 5.7% to a competitive flat 3.8%, now ranking as the 6th lowest in the nation, while California holds the crown with a hefty 13.3%. Meanwhile, states like Texas, Florida, Nevada, Washington, Alaska, and Tennessee boast no state income tax at all!
Louisiana is adopting a simplified flat rate of 3%, moving away from a convoluted tiered system. In addition, the state is nearly tripling its standard deduction while raising its sales tax from 4.45% to 5% for five years—a move designed to streamline tax obligations.
However, tax policy changes often spark scrutiny regarding budget stability and potential shortfalls, which could impact credit ratings and bond sales. All but Vermont mandate balanced budgets, and current tax reforms do not seem to jeopardize the overall financial outlook for state and local governments.
In a recent assessment, Fitch Ratings conveyed a neutral outlook for state and local government credit ratings, spotlighting a combination of strong reserves, reduced liabilities, and prudent fiscal management as key factors keeping these entities on solid ground.
Yet, some states are grappling with budgetary pressures from dwindling gas tax revenues—largely due to the rise of electric vehicles—and the tapering off of pandemic relief funds. “The impacts of federal relief are fading,” remarked the expert. “While it provided a temporary boost, state tax collections remain robust in most areas.”
Looking ahead, budgetary shifts at the federal level are poised to affect state finances, especially with potential cuts to the Medicaid program and ongoing debates surrounding the state and local tax (SALT) deduction. The SALT cap, which limits deductions to $10,000 for state and local taxes, is a crucial element of the Tax Cuts and Jobs Act and is set to expire at the end of 2025. Analysts predict it will either be extended or revised.
In response, 35 states and New York City have devised workarounds for the SALT cap, allowing business owners to navigate the restrictions through state tax credits linked to their business income.
According to the insights, eliminating the pass-through entity exemptions could yield an impressive $200 billion over the next decade—an appealing prospect for state coffers.
