States Reducing Personal Income Tax Rates

During the COVID-19 pandemic, there has been a trend across many states to reduce the income tax rates imposed on individuals.

For example, the enacted 2021-23 Wisconsin budget bill made a number of significant changes under the personal and corporate income taxes, including a personal income tax rate reduction. Specifically, the bill reduced the rate in the third individual income tax bracket from 6.27% to 5.30% starting in tax year 2021.

According to official estimates, that change will reduce Wisconsin personal income taxes by over $2 billion in the 2021-23 biennium.

In signing the bill into law, the Wisconsin Governor referred to both the state’s improved financial situation and the hope that the rate cut would further help residents recover from the effects of the pandemic.

A number of other states have taken a similar approach, as highlighted in the examples below.

Arizona

Arizona individual income tax rates will decrease beginning in the 2022 tax year. For tax year 2022, there is a two-tier individual income tax rate structure with tax rates of 2.55% and 2.98%. If certain revenue targets are met, there will be a reduced two-tier rate structure with tax rates of 2.53% and 2.75% or a flat tax rate of 2.5% beginning in tax year 2023. This replaces the current tax brackets, which have tax rates ranging from 2.59% to 4.5%.

Arkansas

Arkansas has enacted tax rate reductions for the personal income tax, effective for tax years beginning on or after January 1, 2022. The law reduces the top rate over a period of several years; it also restructures and consolidates the lower and middle income tax tables. Additionally, the existing personal income bracket adjustments are divided into smaller income ranges and are adjusted annually to reflect changes to the consumer price index.

Colorado

A proposed initiative to decrease the Colorado income tax rate has received enough signatures to appear on the state's 2022 general election ballot. If approved by voters, Initiative No. 31 would decrease the tax rate from 4.55% to 4.40% for both corporate and personal income taxes, effective for taxable years beginning on or after January 1, 2022.

Idaho

Idaho enacted legislation to reduce the number of personal income tax brackets to five; provide for a one-time tax rebate; and reduce the top tax rate to 6.5% retroactive to January 1, 2021.

Iowa

Iowa personal income tax calculation changes that were possibly going into effect in 2023, if certain triggers were met, will now go into effect unconditionally. This includes personal income tax rate reductions.

Louisiana

In Louisiana, H.B. 278 decreases the existing personal income tax rates to 1.85%, 3.50%, and 4.25% from the current rates of 2%, 4%, and 6%, while retaining the existing brackets. Beginning April 1, 2024, and each April through 2034, further tax rate reductions would be triggered through a calculation reducing the rates by the percent that income tax collections exceed those of FY19 that have been adjusted annually by the expenditure limit growth rate.

Missouri

Current Missouri law provides for a reduction in the top individual income tax rate by 0.1% for each calendar year that certain revenue targets are met. There may now be up to seven of these rate reductions. Previously, the limit was five. Further, beginning with the 2024 calendar year, the top rate of tax will decrease by 0.1%. This is separate from the revenue-based rate reductions. There will be no revenue-based rate reduction in 2024, but those reductions can continue after 2024.

Montana

Montana enacted S.B. 159, which reduces the top personal income tax rate from 6.9% to 6.75% beginning with tax year 2022.

Montana also enacted S.B. 399, which makes significant revisions to the income tax system, generally applicable to tax years beginning after 2023. Under S.B. 399, the starting point for computing Montana personal income tax is changed from adjusted gross income to federal taxable income, with certain adjustments. In addition, the number of personal income tax brackets is decreased from seven to two, with the rates set at 4.7% and 6.5%.

New Hampshire

The interest and dividends tax is being phased out by 2027. From the current 5%, the rate of tax decreases by 1% each year beginning with 2023.

North Carolina

North Carolina enacted budget legislation with major income tax changes that include reducing the personal income tax rate from 5.25% to:

• 4.99% for the 2022 tax year;
• 4.75% for the 2023 tax year;
• 4.6% for the 2024 tax year;
• 4.5% for the 2025 tax year;
• 4.25% for the 2026 tax year; and
• 3.99% for tax years after 2026.

Ohio

Ohio’s enacted budget includes an individual income tax rate cut for nonbusiness income. Previously, the rates ranged from 2.850% to 4.797%. Beginning January 1, 2021, the rates range from 2.765% to 3.990%.

Oklahoma

Under Oklahoma’s budget, the top personal income tax rate is reduced from 5% to 4.75% after 2021.