On January 1, 38 states enacted noteworthy tax changes, according to a report by the Tax Foundation, an independent tax policy nonprofit organization. Most of these changes represent net tax reductions, which are the result of an unprecedented wave of rate reductions and other tax cuts in the past two years, as states respond to burgeoning revenues, greater tax competition in an era of enhanced mobility, and the impact of high inflation on residents.
Among the highlights:
Individual income tax changes. Eleven states had individual income tax rate reductions taking effect on January 1: Arizona, Idaho, Indiana, Iowa, Kentucky, Mississippi, Missouri, Nebraska, New Hampshire (interest and dividends income only), New York, and North Carolina. Three of these states – Arizona, Idaho, and Mississippi – converted from graduated-rate income tax structures to flat tax structures.
In addition, Massachusetts’ individual income tax has converted from a flat to a graduated-rate tax, with a new rate of 9 percent on income exceeding $1 million.
Also, five states – Alabama, Delaware, Iowa, Rhode Island, and Nebraska – have exempted all or a portion of retirement income or military pension income from income taxation.
Two states, Hawaii and Illinois, have expanded their earned income tax credits.
Corporate income tax and other business tax changes. Arkansas, Nebraska, New Hampshire, and Pennsylvania have corporate income tax rate reductions taking effect.
One state, Oklahoma, is offering permanent 100 percent bonus depreciation (full expensing) despite the federal government’s phasedown to 80 percent bonus depreciation. And two states, Louisiana and North Carolina, have indicated they will make their capital stock taxes less burdensome.
Sales and use tax changes. Virginia will newly exempt groceries from its state sales tax base, while Kansas will begin phasing in a state sales tax exemption for groceries by applying a preferential rate. Also, several states will implement other notable new sales tax exemptions, with Colorado and Iowa newly exempting diapers and certain other essential hygiene products.
Moreover, Kentucky will newly apply its sales tax to select services to help pay for individual income tax rate reductions, while Missouri has a sales tax economic nexus statute taking effect in 2023.
Other tax changes. Seven states – Connecticut, Florida, Illinois, Michigan, New York, North Carolina, and Utah – have increased their gas taxes, either due to inflation indexing, automatic adjustments tied to the average price of fuel, or the expiration of gas tax holidays.
