Arizona, Iowa, Indiana, North Carolina, Louisiana – the list of states that are cutting income tax rates is growing day by day. These states also have one thing in common – their income tax cuts dwarf what Utah has done so far.
This fact should not be lost on policymakers in Utah. They have worked hard over the last several decades to make sure Utah is the #1 place in the country to live in and do business in. Rankings like ALEC’s (American Legislative Exchange Council) “Rich States, Poor States” has ranked Utah #1 in the nation every year that the report has been published – 13 years in a row. However, states continue to make aggressive moves to catch up and attract good paying jobs, businesses, and inmigration that swells their tax collections and it is starting to show. States like Arizona, Indiana, North Carolina and others have jumped from the middle of the pack to #2-#5 on the same report and could soon replace Utah at the top of the heap.
These states are gaining ground by enacting well-crafted individual and corporate income tax cuts, especially with the robust tax collections that have been the norm the last couple of years. The main characteristic they all share in common is that there are substantial cuts in their rates – either immediately or phased in over several years or both. The cuts are also a sizable chunk of their budget, showing meaningful fiscal restraint when it comes to growth in government spending. Utah, on the other hand, has only chosen so far a very small cut in the income tax rate, from 4.95% to 4.85%, which equates to only a small sliver of the budget.
In contrast, the largest income tax cut was enacted by our direct neighbor to the south- Arizona. Their legislature and Governor Ducey (R) enacted a cut to the tune of $1.9 billion (yes, you read that right, billion) that equates to almost 15% of their budget, reducing income tax rates from a recent 4.5% to 8% for high income households to a flat tax of just 2.5%. The tax cut is structured to phase in over the next couple of years as revenue triggers that are set in the legislation are hit. Arizona will step into the lead of being the absolute leader for the western United States in being most attractive to capital, companies, jobs and wealth.
They will enjoy the fruits of this leadership for decades to come.
Iowa’s Governor, Kim Reynolds (R), signed legislation last month that takes Iowa from having the 6th highest income tax rate at 8.98% to a flat rate of 3.9%. The cut will be phased in over the next 4 years with rates at 6.00%, 5.70%, 4.82% and 3.90% in 2026 and beyond. The legislation also eliminates the various tax brackets and moves to a single flat rate of 3.90% by 2026.
Iowa has been setting aside revenue for years in a “Taxpayer Relief Fund” that is now allowing them to make such a substantial cut relative to their budget. Prudent long term planning with taxpayers in mind is paying off.
Indiana lawmakers overwhelmingly passed (50-0 in the Senate and 82-17 in the House) and the Governor is expected to sign legislation that cuts their income tax rate from 3.23% to 2.9% over the next several years. The phase in of the cuts is based on the growth of state tax revenues. Once revenue grows more than 2% in 2025, then grows by 2% in 2027 and leaves room to pay off the pre-1996 teacher pension debt and grows by 2% in 2029- the tax rate will be lowered each of those years to 3.1%, 3.0% and 2.9%.
Like many other states, Indiana is using reasonable revenue triggers to methodically lower their income tax rate as revenues grow over time.
Policymakers in North Carolina have been putting on a clinic on how to be the smartest folks in the room when it comes to tax policy since 2013. They have enacted reforms over the last 10 years that have taken them from one of the worst structures in the nation to now having one of the most attractive tax structures in the nation. Using revenue triggers they have lowered their individual income tax rates from 7.75% to 5.25% and their corporate income tax rates from 6.90% to 2.50%.
They did not stop there. This year they enacted legislation that will take their individual income tax rate from 5.25% to 3.99% over the next 6 years and their corporate income tax rate – which is already the lowest in the nation – from 2.5% to 0% by 2030. North Carolina is on track to be one of only 3 states in the country, along with Wyoming and South Dakota, with no levy on corporate income or a gross receipts tax.
Utah’s legislative leaders have signaled a willingness to continue to cut the income tax rate for Utah taxpayers. These other states can provide a template for prudent and methodical, yet meaningful tax relief for all of Utah. Your Utah Taxpayers Association is actively engaged in educating policymakers on how such reforms could be implemented.