Brief 2023 Mid-Year State Tax Actions Update

Amid strong revenue performance and concerns about rising inflation, states have embraced tax relief in recent years. Thirteen states reduced personal or corporate income tax rates in 2021 and another 14 did so in 2022. The tax cuts didn’t stop there; Income tax rebates, gas tax relief, earned income and child tax credits, and retirement income tax reductions, and property tax relief all received a great deal of state attention. In many cases, the tax relief packages have been substantial; reducing revenues by half a billion to over $1 billion annually, once fully phased in.

As a growing number of states wrap up 2023 legislative sessions, it is clear that the tax cutting fervor has not subsided and that relief has been, once again, the most prominent state fiscal trend in 2023.

While the total volume of cuts may not yet rival 2022, at least 13 states have now approved significant tax relief measures that will reduce revenues by hundreds of millions or more. They are summarized below.

Personal and/or corporate income tax rates have been cut in seven states, and three have approved one-time income tax rebate programs. South Dakota cut the state sales tax rate and Tennessee approved a three-month sales tax holiday for food purchases. Many other states have also expanded earned income and/or child tax credits or provided targeted business tax relief.

Several more states are likely to enact significant tax relief measures before the end of the year. Income tax rate cutting legislation is still moving in Arizona, Missouri, Ohio, Nebraska, Oklahoma, and Wisconsin. Minnesota’s House and Senate are weighing competing tax relief proposals. Legislation to reduce the sales tax on groceries has bipartisan support in Alabama. The Texas House of Representatives sent a bill including billions in property tax relief to the Senate.

Fewer states have pursued revenue-raising measures. No broad-based tax increases have been approved in 2023. Even when it comes to excise tax increases, which states often turn to for raising revenue around the margins, only a few bills have made it across the finish line. This is not particularly surprising given strong budget conditions; revenue increases were sparse in 2021 and 2022 as well. However, state tax priorities could change in FY 2024 if there is an economic lull or if states find themselves with tighter budgets than they are expecting. Many states are forecasting continued but weaker tax revenue growth in 2023 and 2024 and will also be grappling with growing spending pressures due to inflation rates and public sector job vacancies.

Select, Significant 2023 Tax Reductions

• Arkansas (SB 549): Cuts the marginal PIT rate from 4.9% to 4.7% and the marginal CIT rate from 5.3% to 5.1%. Estimated to reduce revenues by $124 million annually.
• Florida (HB 7063): Creates permanent sales tax exemptions for many products, including baby products. Creates two, 14-day “back to school” sales tax holidays, one three--month holiday for recreational items, a seven-day tax holiday for skilled worker tools, and a one-year exemption on certain energy star appliances and gas ranges/cooktops. Expands homestead benefits for disabled veterans and surviving spouses and conforms to federal corporate income tax code. Estimated to reduce state and local revenues in FY 24 by $1.38 billion. The measure has only passed the legislature, but a governor’s signature is expected.
• Georgia (HB 162): Creates an individual income tax rebate check of up to $250 for single files. Estimated to reduce revenues by $1 billion.
• Idaho (HB 292): Provides $355 million in property tax reductions.
• Indiana (HB 1001): Expedites the phase-in of an income tax rate cut enacted in 2022 for an (estimated revenue loss of $116.9 million in FY 24); Recouples with the federal earned income tax credit (estimated revenue loss between $14.7 and $20.2 million in FY 24); Increases the exemption for newly claimed child dependents (estimated revenue loss of $3.8 million in FY 24).
• Kentucky (HB 1): Reduces the state income tax rate from 4.5% to 4.0%, accelerating a rate reduction approved in 2022. Estimated $315.8 million revenue loss.
• Michigan (H 4001): Increases the state EITC from 6% to 30% of the federal credit. Restores a full tax exemption on pension income. Dedicates up to $500 million a year to the Strategic Outreach and Attraction Reserve Fund for business incentives. Estimated revenue reduction of roughly $1 billion in FY 2023.
• Montana
  • SB 121: Reduces the marginal individual income tax rate from 6.5 percent to 5.9 percent. Increases the state EITC from 3% to 10% of the federal credit. (-$128 million in Tax Year 2024)
  • HB 222: Creates a property tax rebate of up to $500 per year for tax years 2023 and 2024 (-$142 million in both years)
  • HB 192: Creates a one-time individual income tax rebate of up to $1,250 (-$480 million in FY 23)
  • HB 221: Replaces net long-term capital gains deduction with tax rates of 3.0% and 4.1% (-$15.8 million in FY 25)
• New Mexico (H 547): Increases the child tax credit; provides an income tax rebate of $500 for single filers; increases benefits of the film tax credit. Rebates estimated to reduce revenues by $673 million in FY 23.
• North Dakota (HB 1158): Eliminates bottom income tax bracket, consolidates remaining four tax brackets to two, and reduces rates. The marginal rate is reduced from 2.9% to 2.5%. Increases property tax credits. Estimated revenue reduction of $515 million. ($358 million in personal income tax and $157 million in property tax.)
• South Dakota (HB 1137): Temporarily reduces the sales tax rate from 4.5% to 4.2% for four years. Estimated revenue reduction of $104 million per year.
• Tennessee (H 323): Includes a three-month sales tax holiday for grocery purchases. Exempts a company’s first $50,000 in net earnings from the franchise excise tax. Conforms to federal bonus depreciation. Estimated revenue reduction of $400 million.
• Utah (HB 54): Reduces PIT and CIT rates from 4.85% to 4.65%. Reduces social security taxes by increasing the threshold at which a credit for social security benefits begins to phase out. Increases the EITC from 15% to 20% of the federal credit. Estimated revenue loss of $400 million.
• West Virginia (H 2526): Reduces the rate for all PIT brackets and includes a trigger for further reductions based on general fund revenue performance. Allows refundable credits for the car tax and the business inventory tax, and real property tax credits for disabled veterans. Estimated revenue loss of $114.6 million in FY 23 and $695.6 million FY 24.

Other Noteworthy 2023 Tax Enactments

Personal Income

• Arizona: Budget bill includes a one-time, $250 child credit for taxpayers who have paid income taxes in the last three years.
• Colorado (H 1112)*: Increases the earned income tax credit and expanding eligibility for and increasing the child tax credit.
• Indiana (SB 419): Exempts nonresidents who work in the state for less than 30 days from income tax.
• Hawaii (HB 954)*: Doubles the federal match rate for the EITC and increases the value and income eligibility level for the state food/excise tax credit.

Sales and Excise Taxes

• Arkansas (H 1654): Creates a new sales tax exemption for data centers.
• Indiana (SB 419): Sales tax exemption for solar, wind, and agricultural equipment.
• Kentucky (HB 5): Phases out the state bourbon barrel tax over 18 years.
• Michigan (H 4039): Sales tax exemption for delivery installation services.
• South Dakota (SB 30): Removed 200 separate transactions economic nexus threshold for remote sellers.
• Utah (H 301): Decreased the motor fuel tax rate from 36.4 to 34.5 cents per gallon on July 1, 2023, through December 31, 2023. (The rate can increase by up to as much as 42 cents in 2028 or after.)

Property Tax

• Arkansas (H 1032): Increases homestead property tax credit.
• Iowa (H 718): Property tax legislation estimated to save taxpayers $100 million.
• Wyoming (SJR 3): Places a constitutional amendment on the ballot to create a new property classification for residential real property.

Corporate Income/Business Taxes

• Alabama (H 241): Extends the sunset date for the Alabama Jobs Act and Growing Alabama Act.
• Arkansas
  • (H 1045): Repealed the throwback rule
  • (H 1592): Increases the state film tax credit
• Arizona (S 1260): Reduces small business income tax rate
• Indiana (SB 419): Provides a corporate income tax deduction for federal broadband grants.
• Montana (SB 246): Eliminated tax haven designations and reporting requirements for companies electing a “water’s edge” filing method.
• Minnesota (H 31): Federal conformity measure that updates the state’s tax treatment of disallowed and delayed business interest and net operating loss deductions; creates a 50% deduction limit on meal expenses; and allows employers to deduct wages used to calculate the employee retention credit for venues subject to closure because of COVID-19.
• Mississippi (S 2858): Increases the aggregate amount of investment tax credits that may be allocated to participating investors under the Mississippi Small Business Investment Company Act.
• North Dakota (S 239): Expands individual, corporate, and property tax incentives for renaissance zones.
• Utah (SB 153): Establishes the Redevelopment Matching Grant Program for supporting certain projects related to housing and water conservation and extends certain rural film incentives.
• Passthrough Entity Tax Workarounds: Hawaii (SB 1437)*, Kentucky (H 360), Indiana (SB 2), Iowa (HB 352), Montana (SB 554)*, West Virginia (SB 151)

2023 Tax Increases

Income/Wealth

• Washington: A new capital gains tax on profits over $250,000 that was approved by Washington last year was recently upheld by the state supreme court, after a long legal battle over whether the tax violated the state constitution limit on property taxes. That new tax has reportedly already brought in over $838 million.

Business Taxes

• Single sales factor apportionment approved in Montana (S 124) and Tennessee (H 323). While the revenue impact for this policy varies depending on the state and kinds of businesses it benefits, both Tennessee and Montana estimated that it would raise revenue.

Sales and Excise Taxes

• Mississippi (S 2449): Adds computer software services and electronically stored data to sales tax base.
• New York (S 4009C): Increases the excise tax on cigarettes by $1.

New Taxes

• Delaware (HB 2): Legalizes and taxes adult-use cannabis.
• Utah (H 301): Imposes a tax on sale of electricity for EV charging.
• Indiana (H 1001): Extends the sunset of motor fuel tax rate indexing.
• Kentucky (H 551) and Vermont (H 127): Legalizes and taxes online and retail sports wagering.