A narrow tax base is non-neutral and inefficient. State lawmakers responded to these dire economic forecasts by reducing spending, drawing from their rainy day funds, and, in some cases, even increasing taxes by making changes to their corporate income tax base The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. States would need to make drastic spending cuts and then eventually raise taxes.

In early 2020, economic uncertainty reigned, and most state economists understandably prepared for the worst: revenues would plummet and might not recover quickly. Many policymakers, moreover, saw it not just as an opportunity but as a necessity, a way of demonstrating their state’s commitment to tax and overall economic competitiveness in an increasingly mobile world. States emerging from the public health crisis not only with adequate revenue, but in many cases robust growth, recognized an opportunity for tax relief. Grew over the past year, partly due to time-limited federal infusions, but largely because longer-term economic trends continued almost unabated. For both individuals and corporations, taxable income differs from-and is less than-gross income. Taxable income Taxable income is the amount of income subject to tax, after deductions and exemptions. This is true even when looking exclusively at tax or other own-source revenue, and excluding all federal transfers under the CARES Act, the American Rescue Plan Act, or other federal legislation enacted in response to the pandemic. States concluded Fiscal Year 2021 with substantially more revenue than most thought possible in the early days of the COVID-19 pandemic.

With burgeoning revenues and the prospect of workplace flexibility greatly enhancing the salience of tax competition, 11 states have cut individual or corporate income taxes-or both-thus far in 2021, and there is every reason to believe that more states will follow, if not this year, then undoubtedly in 2022. From the perspective of a year ago, however, it is remarkable that the dominant tax policy trend in the states during their 2021 legislative sessions-concluded now, in many states-was income tax relief. It is not unusual for a theme to emerge from state legislative sessions, as each state responds to similar economic or national trends. To provide targeted relief to those at the lower end of the income spectrum. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. Montana consolidated seven brackets into two, reducing the top rate and adopting a significantly higher standard deduction The standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. Of the 10 states that reduced their individual income tax rates, all but Wisconsin included reductions to the top marginal rate.

Five states–Arizona, Idaho, Louisiana, Ohio, and Oklahoma–enacted laws to reduce each of their marginal individual income tax rates.

Five states– Arizona, Idaho, Iowa, Montana, and Ohio–enacted laws to reduce the number of brackets in their individual income tax, creating a more neutral structure.

Some are retroactive to the beginning of 2021 some take effect in January 2022 and others take effect in 2023 or beyond or phase in over time. These income tax reforms have various effective dates. In many states, these rate reductions are paired with other pro-growth reforms. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. Rates and five reducing corporate income tax A corporate income tax (CIT) is levied by federal and state governments on business profits. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. imposes a progressive income tax where rates increase with income. Rates, with 10 reducing individual income tax An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. In 2021, 11 states have enacted laws to reduce their income tax A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Trend: States Reform Income Taxes To Provide Relief And Remain Competitive Key FindingsĪs states close their books for fiscal year 2021, many have much more revenue on hand than they anticipated last year.

Arizona income tax brackets 2021