Fiscal year 2022 was one of abundance for state legislatures.
From the outset, states across the country, from California to Maryland, announced significant budget surpluses. Halfway through the year, revenues continued to exceed expectations in most states:
- Personal income taxes were performing significantly better than most states anticipated.
- General sales tax collections were expected to exceed estimates in more than half the states.
- Revenues from corporate income tax collections were above estimates in over 20 states.
- Severance tax collections were largely strong in states that levy them.
Historically speaking, states are more likely to reduce tax burdens when times are better. With most state budgets in strong, stable positions, this tendency has played out once again; relief has undoubtedly been the year’s most prominent tax policy trend.
Income Tax Rate Reductions
So far this year, at least 10 states have enacted income tax rate cuts. Several states, including Kentucky, Georgia, Iowa, South Carolina and Virginia, enacted tax reductions that will each exceed $1 billion annually once fully phased in. (The reductions range from 1% to over 5% of the previous year’s total revenue collections, depending on the state.) Nebraska and Mississippi also enacted tax cuts that will cost over $500 million. In many cases, the approved cuts will be phased in over several years or are contingent on revenue triggers being met. Another recent, noteworthy trend is that three of these states—Georgia, Iowa and Mississippi—are moving from graduated structures to a flat tax rate. The following income tax rate reductions were enacted in 2022:
- Georgia (H 1437): Creates a flat tax rate, with a gradual reduction of the rate from 5.75% to 4.99% by 2029.
- Idaho (H 436): Consolidates individual income tax brackets from five to four and lowered the marginal rate from 6.5% to 6% for personal and corporate income taxes.
- Iowa (H 2317): Reduces the personal income tax rate to 3.9% from 8.5% by 2026, and lowers the corporate income tax rate to 5.5% from 9.8%, contingent on revenue triggers being met.
- Indiana (H 1002): Reduces the state flat income tax rate from 3.23% to 3.15%.
- Kentucky (H 8): Reduces the state flat income tax rate to 4.5% from 5% and provides for gradual elimination of the tax contingent on the state meeting a threshold of general fund receipts.
- Mississippi (H 531): Eliminates the lower income tax brackets to establish a flat rate and reduces the marginal rate from 5% to 4% by 2026.
- Nebraska (L 873): Reduces the marginal income tax rate to 5.84% from 6.84% by 2027 and lowers the corporate rate to 5.84%.
- New York (S 8009): Accelerates planned tax cuts for low- and middle-income earners.
- South Carolina (S 1087): Consolidates the number of brackets from six to three and cut the state’s top individual tax rate from 7% to 6.5% for tax year 2022. Provides for additional 0.1% rate reductions each year until the rate reaches 6%, starting with tax year 2023, contingent on revenue triggers being met.
- Virginia (H 30): Increases the standard deduction from $4,500 to $8,000 for individuals between January 2022 and 2026, with the full deduction being contingent on revenue growth exceeding a specified amount.
- Utah (S 59): Reduces the personal and corporate income tax rates from 4.95% to 4.85%.
Other Individual Relief
In addition to income tax cuts, there are several broad categories of individual tax relief states have pursued in 2022:
Sales Tax Reductions
At least 14 states proposed cutting sales tax rates, but New Mexico (H 163) has been the only one to enact a reduction. The state reduced the gross receipts tax rate by a quarter of a percent, from 5.125% to 4.875%.
Several of the 13 states that apply sales tax to groceries reduced or eliminated them this year. Kansas enacted a measure to phase out grocery taxes by 2025 (H 2106), and Virginia eliminated the state’s reduced 1.5% grocery tax (H 30). Illinois suspended sales taxes on groceries for one year (S 157), Tennessee authorized a one-month food tax holiday and Idaho approved an increase in the state grocery tax credit (S 509). Food purchases are a significant component of sales tax bases in states that tax them, and most of these reductions were estimated to reduce revenues by hundreds of millions of dollars.
Income Tax Rebates
At least eight states have adopted new, one-time income tax rebate programs this year. Most of the programs have been projected to cost states hundreds of millions of dollars as well. A recently enacted rebate in South Carolina has a $1 billion price tag; in Colorado the rebates will reduce revenues by $900 million. Rebates were estimated to cost $682 million in Maine, $350 million in Idaho and $230 million in Delaware.
- Colorado (H 233): Provides $400 for individuals, $800 for families.
- Delaware (H 360): One-time direct payment of $300 per resident taxpayer.
- Idaho (H 436): $75 rebate for each taxpayer and dependent.
- Illinois (S 157): For individuals earning less than $200,000 during tax year 2021, a one-time rebate of $50 for single filers and $100 for joint filers, with an additional $100 per dependent for up to three dependents.
- Maine (H 1482): One-time, $850 checks for an estimated 858,000 resident taxpayers with a federal adjusted gross income of less than $100,000.
- New Mexico (H 163 and H 2a): H 163 provides $250 for individuals, $500 for joint filers. H 2a provides $500 to single filers and $1,000 for joint filers.
- South Carolina (H 5150): Rebates for individuals up to $800 based on the amount paid in state income tax.
- Virginia (H 30): $250 rebates for individual taxpayers.
Retirement Income Relief
At least 10 states have adopted legislation to provide beneficial tax treatment for social security benefits or retirement income.
- Alabama (H 162): Makes up to $6,000 of taxable retirement income exempt from state income tax.
- Connecticut (H 5506): Exempts pension and annuity earnings from the state income tax.
- Georgia (H 1437): Increases retirement income exclusion.
- Iowa (H 2317): Exempts retirement income from tax for residents age 55 and older.
- Maryland (H 1468): Modifies retirement income subtraction for public safety employees and creates a new retiree tax credit.
- Nebraska (LB 873): Accelerates phaseout of income tax on social security benefits.
- New Mexico (H 163): Exempts social security income from income tax for certain individuals.
- Utah (S 59): Expands eligibility for the social security benefits tax credit by increasing the threshold for the income-based phaseout.
- Vermont (H 510): Expands income threshold for social security exemption.
- Virginia (H 30): Increases exemption on military retirement income.
Motor Fuel Tax Holidays
At least 20 states have considered measures addressing motor fuel tax relief in the face of high prices at the pump. Legislation has been approved in at least six states. Most enactments have provided temporary tax holidays of one to six months. Rather than create a tax holiday, Illinois suspended gas tax inflation adjustments. Most of these measures are expected to reduce revenues by tens to hundreds of millions of dollars.
- Connecticut (H 5501): Suspends gas tax through Nov. 30, 2022; estimated $90 million loss.
- Florida (H 7071): Creates gas tax holiday during October 2022; estimated $200 million loss.
- Georgia (H 304): Suspended gas tax from March 18- May 31, 2022. An executive order extended suspension to July 14; estimated monthly loss of $160 million.
- Illinois (S 157): Suspends motor fuel tax inflation adjustment for six months from July 1 to Dec. 31, 2022.
- Maryland (H 1486): Waives state gas tax for 30 days; estimated $93.6 million loss.
- New York (S 8009): Suspends gas tax for seven months, from June 1 to Dec. 31, 2022; estimated $585 million loss.
Earned Income and Child Tax Credits
To provide relief for lower- and middle-income earners, at least 12 states and Guam have expanded existing earned income tax credit programs or created new ones. Six states have also adopted new child tax credits or expanded existing ones.
- California (SB 201): Expanded both the young child tax credit program and the state EITC.
- Connecticut (H 5506): Expands state EITC program and creates new child tax credit.
- Guam: Received federal assistance to cover the cost of EITC reimbursements.
- Hawaii (H 2510): Makes the state EITC refundable and permanent.
- Illinois (S 157): Expands state EITC program.
- Maine (H 1482): Expands state EITC program.
- Maryland (S 369): Establishes a new program to identify residents who are eligible to claim the state EITC but have failed to do so and to provide them with a streamlined method to claim it.
- New Mexico (H 163): Creates new child tax credit.
- New Jersey (S 2523): Establishes a new child tax credit.
- New York (S 8009): Expands state EITC program.
- North Dakota (H 1515): Creates a temporary, nonrefundable individual income tax credit.
- Pennsylvania (H 1342): Establishes a new child tax credit.
- Virginia (H 30): Makes the state EITC refundable.
- Vermont (H 510): Expands state EITC program and implements new child tax credit.
- Utah (S 59): Creates new, nonrefundable earned income tax credit equal to 15% of the federal amount.
- Washington (H 1888): Expands the state EITC by adjusting the rates of remittance reductions in the tax credit in order to align with federal maximum qualifying income levels.
Property Tax Relief
Property tax relief enactments this year:
- Colorado (S 238): Reduces property tax assessment rates and taxable valuations for the 2023 and 2024 tax years; estimated to provide $700 million in relief over two years.
- Connecticut (H 5506): Increases property tax credit from $200 to $300.
- Idaho (H 550): Expands the circuit breaker tax exemption.
- Illinois (S 157): Approves a property tax rebate; estimated to cost $475 million.
- Nebraska (L 873): Creates refundable income tax credit for community college taxes paid.
- New York (S 8009): Creates $2.2 billion property tax rebate credit.
- Texas (Proposition 1 and Proposition 2): Two ballot measures, both approved by voters, will reduce property tax revenues by roughly $2.3 billion from 2023 through 2026.
Other Business Tax Relief
Business-specific enactments fell into several categories this year.
Business Tax Rate Cuts
In addition to corporate income tax reductions noted above, New Hampshire passed legislation (H 1221) to reduce the business profits tax by one-tenth of 1%.
SALT Cap Workarounds
There has been an explosion in new entity-level taxes for S-corporations ever since the federal government capped the deduction for state and local income, sales and property taxes as part of the Tax Cuts and Jobs Act. Going into 2021, seven states had adopted new entity-level taxes, which are fully deductible at the federal level, and created offsetting state income tax credits to allow businesses to access the full value of their state and local tax deductions.
Fifteen states enacted SALT cap workarounds in 2021 and at least six more have done so in 2022: Kansas (H 2239), Mississippi (H 1691), New Mexico (H 102), Ohio (S 246), Utah (H 444) and Virginia (H 1121).
Several states have expanded or created new business tax credits, often with the intention of encouraging greater rates of hiring or capital investment. Film tax credits, in particular, have been popular in 2022.
- Illinois (S 157): Extends the Growing Economy Tax Credit.
- Kansas (S 347): Creates new $800 million investment incentive program for specified industries.
- Maryland (H 2): Allows employers to claim a tax credit for certain wages paid to individuals with barriers to employment.
- New York (S 8009): Provides $600 million in incentives for Buffalo Bills’ stadium construction.
- Ohio (H 687): Approves $2.1 billion incentive package targeting Intel Corp.
- Oklahoma (H 4455): Approves the Large Scale Economic Activity and Development Act, creating a $698 million incentive program.
New or expanded film tax subsidies were approved in at least seven states: Illinois (S 157), Indiana (S 361), Maryland (S 536), New Jersey (S 4094), Oregon (H 4153), Utah (S 49), Washington (H 1914) and West Virginia (H 2096).
Lawmakers continue to examine the apportionment formulas states use to determine tax liability for multistate corporate taxpayers. Many states are moving away from the traditional three-factor apportionment formula, based on payroll, property and sales, in favor of single sales factor apportionment for determining corporate income tax liability. A goal of single sales factor apportionment is to incentivize businesses to build out payroll and property in a state, and states typically anticipate that it will reduce revenues.
This year, Idaho (H 563) and Vermont (S 53) adopted measures moving to single sales factor apportionment, and several states, including Kansas, New Mexico, Oklahoma, considered similar legislation as well.
Despite the current rosy revenue picture, concerns are on the horizon. Much of the robust revenue growth states have experienced can be attributed to one-time federal transfers that were included in the Coronavirus Aid, Relief and Economic Security Act and the American Rescue Plan Act. There is still uncertainty in many states about what their economies and budgets would look like without that aid.
Ongoing concerns include inflation, stock market performance, new COVID strains, and the economic reverberations accompanying the Russian invasion of Ukraine. While the recovery from the recent downturn featured growth in consumer spending due to pent-up demand and increases in income, there are signs that this activity is beginning to slow. According to the nonpartisan The Tax Policy Center, inflation-adjusted sales tax revenues declined 1.2% in April 2022 compared with a year earlier. Most states are forecasting weaker tax revenue growth in 2023 and, given inflation rates and public sector job vacancies, states will likely face increased spending and wage pressures. State tax relief efforts are likely to slow as these issues linger or build momentum.
Jackson Brainerd is a program principal in NCSL’s Fiscal Affairs Program.