Major Income Tax Cuts Enacted And Advanced In Slew Of GOP-Run States
Kansas state capitol in Topeka
Lawmakers in multiple states have passed significant income tax rate cuts in recent weeks. Mississippi lawmakers and Governor Tate Reeves (R) enacted legislation in March that will phase out the Magnolia State's 4% income tax over time based on revenue triggers. Shortly thereafter, Kansas lawmakers followed suit by overriding a gubernatorial veto to enact income tax relief that moves the state tax code to a lower, flat rate.
Kansas Senate President Ty Masterson (R) and Speaker Dan Hawkins (R) led the charge for Senate Bill 269, legislation enacted this week that will move Kansas from a progressive income tax code with a top rate of 5.58% to a 4% single rate income tax. Kansas lawmakers passed this income tax cut at the end of March and Governor Laura Kelly (D) vetoed it on April 10. On April 15, Kansas lawmakers enacted SB 269 by voting to override Governor Kelly's veto.
SB 269 includes a revenue trigger resulting permanent rate cuts whenever a stipulated level of revenue collection is exceeded. Under 269, all surplus revenue collections exceeding growth in regional CPI inflation will be returned to taxpayers in the form of permanent income tax cuts until the rate falls to 4%. The tax reform package championed by Masterson and Hawkins also cuts the state corporate tax rate to 4% based on revenue triggers.
Many in South Carolina hope their state is the next to enact rate-reducing income tax reform. Speaker Murrell Smith (R) and his colleagues introduced legislation in March to move the state from a progressive income tax with a top rate of 6.2%, to a flat 3.99% income tax.
An economic impact study recently released by the Palmetto Promise Institute and the Buckeye Institute concluded that moving to a lower, flatter rate would come with many benefits for South Carolina residents and the state's economy.
'Broadening the base and moving to a flat rate of 3.99% will result in South Carolina's economy adding 1,000 jobs in 2026 and an average of 1,000 additional jobs each year between 2027 and 2030,' noted Oran Smith, senior fellow at the Palmetto Promise Institute. 'South Carolina's GDP will grow by $240 million in 2026 and average $250 million over the next 5 years, if the tax rate stays at 3.99%. Families will buy more because, they will have more money to purchase goods, and save and invest over $100 million annually each year over the next five years.
'Dynamic economic modeling, which considers how people and businesses respond to policy changes, shows that this tax plan will make South Carolina a more prosperous state and poised to compete with neighboring states that have already enacted tax policy reform over the past few years,' Smith added. 'The scenario below models collapsing all current personal income tax brackets in South Carolina into a single bracket with a flat rate of 3.99%. Table I below presents the dynamic effects of this scenario. Under this scenario, South Carolina's economic output (GDP) would increase by $240 million (2024 dollars) in 2026, with investment increasing by $110 million and consumer spending increasing by $70 million in the same year. Ultimately, the number of jobs for 2026 would be expected to increase by 1,000.'
At the March 18 press conference announcing the Speaker's tax reform proposal, Governor Henry McMaster (R) and South Carolina Senate leaders announced that they, like Speaker Smith and his colleagues, see income tax rate reduction as a top priority to pass before adjourning session in May.
The South Carolina House Ways & Means Committee will hold a hearing next week to take up the Speaker's tax reform bill and consider amendments. If they're successful, South Carolina will soon have a lower rate than neighboring Georgia and will be on more competitive footing relative to North Carolina.
Underscoring the heightened level of state tax competition, North Carolina lawmakers took action this week to increase their fiscal policy advantage over South Carolina, Georgia, and other states. The North Carolina Senate passed a new budget on April 17 that would take the state's 4.25% flat income tax down to 1.99%, provided certain revenue triggers are met. Under current law, North Carolina's income tax rate will fall to 3.99% and possibly as low as 2.49% so long as revenue triggers are met.
Like their counterparts in North Carolina, the Oklahoma Senate approved income tax relief this week. On April 14, the Oklahoma Senate passed House Bill 1539, legislation that phases out the state income tax entirely over time based on revenue triggers being met.
Oklahoma currently has a progressive income tax with a top rate of 4.5%. If the Oklahoma House votes to concur with the changes made by the state senate, the bill will go to Governor Kevin Stitt (R) for his signature. Governor Stitt has long been a champion of phasing out Oklahoma's income tax.
'There are nine states with no state penalty on work,' said Oklahoma Sen. Micheal Bergstrom (R-Adair). 'Consistently, they're experiencing better growth and opportunity, and this is not a surprise. When you don't penalize work and job creation in the form of state income taxes, your citizens are better positioned to pursue opportunity for themselves and to expand opportunity for others.'
National media outlets have published multiple articles in recent days and weeks alleging that Republican members of Congress are warming up to the prospect of allowing the top marginal federal income tax rate to go up for filers whose income exceeds some amount. On April 17, however, Kimberley Strassel reported in the Wall Street Journal that the push to raise the top marginal income tax rate is being led by certain White House staffers, which Larry Kudlow has also reported. While some advisers may be trying to convince the President to break a well documented campaign promise by raising the top federal income tax rate, Republican state lawmakers across the country are going in the other direction, taking action to reduce top rates, move to flatter income tax codes, and ultimately end state taxation of household earnings.
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