As Americans celebrate the founding of a nation birthed out of a dispute over taxation, tens of millions of people across the U.S. will soon have greater freedom to enjoy the fruits of their labor thanks to state income tax cuts that have been enacted in ten states this year to date, with a few more legislatures poised to pass meaningful tax relief before adjourning for the year.
“You guys, I think it’s time to give ordinary people a tax break,” President Joe Biden said while speaking at a June 29 event in LaCrosse, Wisconsin. It just so happens that is exactly what the Republican-run Wisconsin Legislature did the same week that President Biden was in the Badger State, and is what Republican-led legislatures in other states have accomplished this year.
While President Biden was in the state taking about the need for tax relief, the Wisconsin Assembly and Senate passed a new budget that cuts the state’s second highest income tax rate from 6.27% to 5.3%. Though the budget approved by the legislature broke sharply with the budget proposed by Governor Tony Evers (D) earlier in the year, it still garnered bipartisan support.
“The full Legislature has now passed the most conservative budget in a generation turning Governor Evers’ bloated, political document into a responsible, bi-partisan success story for our state,” Wisconsin Senate Majority Leader Devin LeMahieu said in a press release following the budget’s passage. “In addition to a transformational $3.4 billion tax cut, the Legislature made targeted investments in every essential function of state government including significant new money to schools, frontline healthcare workers, and a fully-funded transportation system all while maintaining historically low state spending.”
If Governor Evers signs this new tax cutting budget into law, he’ll be the second Democratic governor to approve an income tax cut passed by a GOP-run legislature in 2021. Louisiana Governor John Bel Edwards (D) signed an income tax cut passed by the Republican-controlled Louisiana Legislature in June that will cut state income tax rates from 2% to 1.85% on the first $12,500 of income, from 4% to 3.5% on the next $37,000, and from 6% to 4.25% on income above $50,000.
That income tax relief in Louisiana is dependent on voter approval of an October ballot measure that would end the state tax deduction for taxes paid to the federal government, a provision only six states have on the books. Governor Edwards also signed legislation cutting the state corporate franchise tax.
“The October ballot will give Louisianans a chance to take the first step towards Louisiana’s comeback story by reforming the state’s overly complex and burdensome tax code, and given the economic data from the past months, these changes can’t come soon enough,” writes John Kay, Vice President at the Pelican Institute for Public Policy, a Louisiana-based think tank.
Republicans capitalized on their newly won control of two state legislatures in 2020 by enacting permanent income tax rate cuts in 2021. Democrats spent millions of dollars to flip control of state legislatures last year, to no avail. Republicans, however, won control of the New Hampshire and Montana legislatures along with gubernatorial contests in both states. The new budget signed into law by New Hampshire Governor Chris Sununu (R) in June phases out the Granite State’s tax on investment income, making New Hampshire a true no-income-tax state. In April Montana Governor Greg Gianforte (R) enacted legislation cutting Montana’s top state income tax rate from 6.9% to 6.5%.
While President Biden is pushing for a retroactive tax hike with his proposed capital gains tax increase, Republican-run states are passing retroactive income tax relief. Idaho Governor Brad Little (R), like his counterpart in Montana, cut his state’s top income tax rate from 6.9% to 6.5%. Like the income tax cut in Montana, the tax relief in Idaho is made retroactive to the first day of 2021.
Days before Wisconsin lawmakers approved the largest tax cut in their state’s history, the Republican-run Ohio Legislature passed the greatest income tax cut in Buckeye State history. The new biennial state budget approved by Ohio legislators on June 29, cuts the state income tax by $1.7 billion.
With this new budget, Ohio legislators repealed the top income tax bracket and lowered rates for the four remaining brackets, resulting in a new top rate of 3.99%. The new Ohio budget raises the standard deduction, also referred to as “the zero tax bracket,” increasing it from $22,600 to $25,000.
A week that began with passage of the largest income tax cut in Ohio history ended with a federal judge siding with Ohio Attorney General David Yost (R) in his lawsuit against the provision in America Rescue Plan Act (ARPA), the $1.9 trillion spending bill approved by Congress earlier in the year, that attempts to prohibit state tax relief. On July 1, U.S. District Judge Douglas R. Cole of the District Court for the Southern District of Ohio ruled that the challenged ARPA provision, because of its ambiguity, surpasses Congress’s authority under the Spending Clause. The U.S. Treasury Department is expected to appeal the decision.
“We are confident that the act is constitutional and Treasury is committed to implementing it in a manner consistent with Congress’s direction so we can continue to promote a robust and equitable recovery,” a Treasury Department spokesperson said in a statement.
“The federal government has to stay in their lane, and if they don’t, we’re prepared to bump them up against the guardrail and keep them where they belong,” Ohio Attorney General Yost said in response to the ruling. “The progressives are going to be howling right now because they don’t like the idea that the federal government can’t tell Ohio what to do with its tax policy, but they’ll be quoting this decision soon enough to a Republican president who might want to tell a blue state how to run their state.”
That ruling is good news for state lawmakers and governors who have already passed tax relief this year, as well as those preparing to do likewise. In North Carolina, for example, taxpayers may soon receive a significant income tax cut as part of the new budget, if one is approved later this summer.
The new budget approved by the North Carolina Senate on June 24 cuts the state’s flat personal income tax rate from 5.25% to 3.99%. The Senate-approved budget also phases out the state corporate income tax entirely by 2028, making North Carolina one of only three states, Wyoming and South Dakota being the other two, that does not impose a corporate income tax or a gross receipts tax on business income.
“Because of the state’s strong financial position after a decade of responsible governance, Senate budget writers could pair historic tax cuts with a massive infrastructure package,” Senate Leader Phil Berger (R) said. “Responsible spending, tax cuts whenever possible, and saving for a rainy day have defined Republican budgets for 10 years, and the formula works.”
By cutting taxes, expanding school choice, and keeping the uptick in state spending below the rate of population growth plus inflation, the budget approved with bipartisan support in the North Carolina Senate achieves the conservative trinity. If the budget passed the North Carolina House later in July includes the Senate-approved tax relief and it becomes law, which will likely require overriding a veto from Governor Roy Cooper (D), North Carolina will become the 11th state where income tax relief has passed this year (12 if you count the standard deduction increase signed into law by Georgia Governor Brian Kemp earlier in the year).
Perhaps the most heralded state income tax cut of 2021 is the one signed into law by Arizona Governor Doug Ducey (R) on June 30. That tax reform package, which was passed as part of the new state budget, moves Arizona to a flat 2.5% income tax, which will cut taxes for every income tax bracket.
“Each and every Arizona taxpayer, no matter their income, will experience a tax cut under our historic tax reform,” Governor Doug Ducey said after signing the tax cut into law. “That means job creators will continue to choose our state to expand operations, working families will get to decide how they spend more of their hard-earned dollars, and those who served our nation will rightfully keep more of their own money.
The Biden White House and congressional Democrats are using their power in Washington to push for unprecedented levels of federal spending and historic tax increases. Republican run states, meanwhile, continue moving in the opposite direction, enacting tax relief, expanding school choice, and keeping spending in check. As with reforms that expand school choice, it’s also been a banner year for state tax relief and it’s only halfway over.