By Jackson Brainerd
This has been an extremely important year for state taxes.
First, the enactment of federal tax reform at the end of 2017 demanded immediate attention from state legislatures, and has easily been the most pressing and widely addressed tax issue during the 2018 legislative sessions. Then came the U.S. Supreme Court’s Wayfair decision in June, which opened the floodgates for states to start collecting sales taxes from certain out-of-state online retailers.
These two developments are significant boons for state coffers, especially after years of relatively modest revenue growth. States estimated that they stood to gain several to hundreds of millions of dollars because of the expanded tax base at the federal level and similar estimates have been made in fiscal notes accompanying remote sales tax legislation. The prospect of this new money seems to have given states an opportunity to look into cutting tax rates themselves, specifically for personal income and corporate taxes.
Between 2008 and 2015, 14 states reduced personal income tax rates. These cuts were frequently paired with increases in consumption taxes; 14 states increased sales taxes over the same period. Both 2016 and 2017 were relatively slow-growing revenue years, and while states such as Arkansas and New York enacted some income tax cuts for middle- and lower-income workers, the more noteworthy state tax reform efforts involved significant income tax rate hikes in Illinois and Kansas. But now, after a brief hiatus, income tax cuts are surging again. Georgia, Idaho, Iowa, Kentucky and Missouri all enacted legislation to reduce personal and corporate income tax rates and at least seven other states considered cuts as well.
Here’s a look at 2018 state tax cut enactments:
- Georgia (HB 918): Georgia enacted legislation that conformed the state tax code to certain provisions of the TCJA, and used some of the expected new revenue to reduce the top individual and corporate tax rates from 6 percent to 5.75 percent effective Jan. 1, 2019. Personal income tax rates will fall to 5.5 percent in 2020 if the legislature and governor ratify a joint resolution related to the reduction on or after Jan. 13, 2020.
- Kentucky (HB 366): As part of a large tax measure that was enacted via a legislative override of a gubernatorial veto, the individual and corporate income tax rates were set at a flat rate of 5 percent of net income. (Both were previously progressive bracket structures with marginal rates of 6 percent.) The bill also raised revenue by including economic nexus legislation requiring remote sellers with more than $100,000 in sales or 200 transactions into the state to collect sales taxes, as well as a cigarette tax increase to $1.10 per pack.
- Missouri (HB 2540/SB 884): HB 2540 eliminates the top income tax bracket of 5.9 percent for income over $9,000 and replaces it with a new top rate of 5.4 percent for income over $8,000 starting in tax year 2019. The state still maintained a provision from a 2014 enactment that provides for 0.1 percent reduction in tax rates annually contingent on net revenue for the previous fiscal year exceeding the largest amount of general revenue collected in any of the three fiscal years prior by $150 million. SB 844 will reduce the corporate tax rate from 6.25 percent to 4 percent starting in January 2020.
- Idaho (HB 463): The state reduced the rate for all tax brackets by 0.475 percent (the old marginal rate was 7.4 percent) and cut the corporate income tax rate from 7.4 percent to 6.92 percent. The legislation was retroactive to Jan. 1, 2018, and was expected to reduce general fund revenue by $200 million a year.
- Iowa (SF 2417): The state reduced the number of brackets from nine to four and cut tax rates across the board, with the marginal rate falling from 8.98 percent to 8.53 percent in 2019, and then again to 6.5 percent in 2023, contingent on the state exceeding revenue trigger. The measure also cut corporate income tax rates effective Jan. 1, 2021, with the marginal rate being reduced from 12 percent to 9.8 percent. The legislation raised revenue by expanding the sales tax base to include sales made by out-of-state remote retailers as well as digital goods, ride sharing and a number of services.
With so many states still needing to address various aspects of federal tax reform and the new legal landscape for the sales tax nexus, it’s a safe bet that 2019 will see additional states seeking similar reforms. Case in point: Arkansas’s Tax Reform and Relief Legislative Task Force recently recommended a proposal that would pair a South Dakota-style remote sales tax collection requirement with a cut to the marginal individual income tax rate of 6.9 percent to 6.5 percent.
Jackson Brainerd is a policy specialist with NCSL’s Fiscal Affairs Program.