July marked the beginning of Fiscal Year 2024 for 46 of the 50 states. It also closes the books on most state legislative sessions in what was an incredible 2023 for hard-working taxpayers.
In recent years, we’ve seen significant income tax relief in the states. Notably, 10 states – Kentucky, West Virginia, Montana, Utah, Arkansas, North Dakota, Indiana, Nebraska, Connecticut, and Ohio – have cut personal income taxes (PIT) in 2023. With the new addition of West Virginia, North Dakota, and Connecticut, 22 states have cut personal income taxes since 2021, with several of these states cutting taxes multiple times during that period.
Despite the economic turmoil caused by the COVID-19 pandemic, many states have found themselves flush with cash, especially as economies began to reopen. Some of the budget largess can be directly traced back to trillions of federal dollars pumped into the economy – some directly infused into state budgets. Of course, states are facing a long-term trap with the so called “free” federal aid. As the great economist Milton Friedman always said, there is no such thing as a free lunch.
In almost every case of the cuts enacted this year, the goal seems to be clear: a fairer, less burdensome tax system – a goal that falls right in line with the ALEC Principles of Taxation. In addition to the rate cuts, most of these states reduced the number of brackets, the exception being Kentucky which already has a flat PIT. These changes ride the coattails of the historic 2022 State Flat Tax Revolution which saw five states switch from progressive PIT structures to a flat tax. Lawmakers in these states understand that a less progressive income tax structure is ultimately a better system of taxation since their states will avoid penalizing earned success through hard work.
As Washington’s infamous partisan gridlock continues to inhibit free market reforms that would revitalize our economy and lift real wages, we can continue to look to the states, our 50 laboratories of democracy, to deliver meaningful tax relief to hardworking taxpayers across America.