The new year brings the start of new tax laws in 39 states as the trends reveal a mix of cuts, taxpayer rebates and moves away from progressive policy in favor of flattening.
"A growing number of states have either adopted or are pursuing flat income taxes, with Iowa and Louisiana bringing the total number to 14 as of this year," said Jared Walczak, VP of state projects, the Tax Foundation.
"Full income tax repeal is an increasingly serious discussion in some states, though in most cases, there's not yet much enthusiasm for the sort of revenue offsets that would make income tax elimination possible."
The comments come in conjunction with a
According to the summary, nine states including Indiana, Iowa, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, and West Virginia are cutting individual income tax rates to kick off the new year. South Carolina is making a temporary reduction permanent.
Iowa's rate was cut to a flat 3.8% from 5.7%, making it the 6th lowest rate in the country. California has the highest, at 13.3%. Several states, including Texas, Florida, Nevada, Washington, Alaska and Tennessee have no state income tax.
Louisiana is dropping to a flat 3% rate as opposed to a complex tiered system. The state also nearly tripled the standard deduction while increasing its sales tax to 5% from 4.45% for five years.
Changes in tax policy typically invite budget scrutiny and sometimes raise concern about possible budget shortages, which could affect credit ratings and eventually bond sales.
Every state but Vermont requires by law that budgets remain in balance and so far, the tax machinations don't seem to be having any effect on the overall outlook for state and local finances.
In December 2024, Fitch Ratings rolled out its outlook for state and local government credit ratings and judged them with a neutral outlook.
"A combination of robust reserves, significant liability reductions and other prudent budget management measures leaves state and local governments well positioned as pre- pandemic fiscal conditions take hold again," said Eric Kim, senior director at Fitch.
Some states are feeling
"Most of the impacts of federal relief have now dissipated," said Walczak. "That boost was always temporary and is now largely in the rearview mirror, but state tax collections remain robust in most states.
Budget moves at the federal level are expected to impact the states as possible cuts to the Medicaid program and changing the rules on the state and local tax deduction dominate the discussions.
The SALT cap put a limit of $10,000 on tax deductions that can be taken for state and local taxes. It's a key provision of the Tax Cuts and Jobs Act which is set to expire at the end of 2025. Most analysts are betting SALT will be extended and probably revised.
Thirty-five states and New York City have legalized workarounds for the SALT cap deduction by allowing business owners to sidestep the cap by receiving income through their businesses which triggers a state tax credit.
According to The Tax Foundation eliminating the pass-through entity exemptions would raise $200 billion over ten years.
