“A growing variety of states have either adopted or are pursuing flat income taxes, with Iowa and Louisiana bringing the full number to 14 as of this 12 months,” said Jared Walczak, VP of state projects, the Tax Foundation.
The Tax Foundation
The brand new 12 months brings the beginning of latest tax laws in 39 states because the trends reveal a combination of cuts, taxpayer rebates and moves away from progressive policy in favor of flattening.
“A growing variety of states have either adopted or are pursuing flat income taxes, with Iowa and Louisiana bringing the full number to 14 as of this 12 months,” said Jared Walczak, VP of state projects, the Tax Foundation.
“Full income tax repeal is an increasingly serious discussion in some states, though usually, there’s not yet much enthusiasm for the kind of revenue offsets that may make income tax elimination possible.”
The comments come together with a summary of state tax law changes prepared by the Tax Foundation, which is a non-partisan think tank and distinguished voice in tax policy.
In line with the summary, nine states including Indiana, Iowa, Louisiana, Mississippi, Missouri, Nebraska, Recent Mexico, North Carolina, and West Virginia are cutting individual income tax rates to kick off the brand new 12 months. South Carolina is making a brief reduction everlasting.
Iowa’s rate was cut to a flat 3.8% from 5.7%, making it the sixth lowest rate within the country. California has the best, at 13.3%. Several states, including Texas, Florida, Nevada, Washington, Alaska and Tennessee haven’t any state income tax.
Louisiana is dropping to a flat 3% rate versus a fancy tiered system. The state also nearly tripled the usual deduction while increasing its sales tax to five% 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 rankings and eventually bond sales.
Every state but Vermont requires by law that budgets remain in balance and to date, the tax machinations aren’t having any effect on the general outlook for state and native funds.
In December 2024, Fitch Rankings rolled out its outlook for state and native government credit rankings and judged them with a neutral outlook.
“A mixture of strong reserves, significant liability reductions and other prudent budget management measures leaves state and native governments well positioned as pre- pandemic fiscal conditions take hold again,” said Eric Kim, senior director at Fitch.
Some states are feeling budgetary pressure from quite a lot of sources including gas tax revenue cuts attributed to the usage of electric vehicles and the tip of pandemic relief funds from the feds.
“A lot of the impacts of federal relief have now dissipated,” said Walczak. “That boost was all the time temporary and is now largely within the rearview mirror, but state tax collections remain robust in most states.
Budget moves on the federal level are expected to affect the states as possible cuts to the Medicaid program and changing the principles on the state and native tax deduction dominate the discussions.
The SALT cap put a limit of $10,000 on tax deductions that could be taken for state and native taxes. It is a key provision of the Tax Cuts and Jobs Act which is ready to run out at the tip of 2025. Most analysts are betting SALT will probably be prolonged and possibly revised.
Thirty-five states and Recent 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.
In line with The Tax Foundation eliminating the pass-through entity exemptions would raise $200 billion over ten years.