While dysfunction and inaction defined the federal government this past year, many states took matters into their own hands and enacted tax reform legislation to increase their economic competiveness.
A recent report by the American Legislative Exchange Council found that 14 states cut taxes in 2014, compared to 18 states the previous year. The states were: Arizona, Florida, Indiana, Kansas, Maryland, Michigan, Minnesota, Missouri, Nebraska, New York, Ohio, Oklahoma, Rhode Island, and Wisconsin.
Cutting taxes has become a bipartisan priority at the state level. The economic benefits of a simpler, lower, and fairer tax system are clear to both Republicans and Democrats, and states will likely continue to build on their successes.
To qualify as passing a tax cut for the ALEC report, states must have substantially cut taxes in ways that apply broadly and neutrally, without creating special treatment for particular industries. The cuts must also have resulted in net declines in tax receipts, with the votes occurring during the 2014 legislative session.
Last year, several states, namely Minnesota, New York, Rhode Island, and Maryland, lowered estate taxes by increasing exemption levels. The estate tax is a tax on the transfer of property after people die. The sort of tax is particularly harmful to state budgets since individuals spend substantial amounts of time and money not only on estate tax planning, but also on moving to states with low estate taxes. When residents move, they take their incomes with them. The 14 states that had an estate tax in 2013 had $92.7 billion in net outflows of adjusted gross income from 2000 through 2010, the latest data available. It is difficult for one state to keep a high estate tax rate without losing residents to surrounding states that do not levy the tax.
Other states cut taxes by lowering fees. Proceeds from fees are pooled into states’ general funds. Smart tax policy requires that when states levy fees for services, these proceeds go towards funding specific activities associated with the services, not to states’ general funds. Rather than nickel-and-diming their residents, states should work to give them some relief by lowering unnecessary fees.
One of the states that followed this advice was Florida, as the state voted to lower its motor vehicle license renewal fee. Since a large percentage of the population drives in Florida, this move will allow Floridians to keep an extra $395 million a year—over $20 per driver. Kansas, a state that has drastically cut taxes every year since 2012, will phase out its mortgage registration fees over the next five years, providing its residents with further tax relief.
In addition to its estate tax reforms, New York enacted substantial corporate tax reform in its 2014 budget. These reforms were sorely needed—last year New York ranked last among the states in both its economic outlook and business tax climate. New York’s tax reforms were so impressive that the nonpartisan Tax Foundation awarded Democratic Governor Andrew Cuomo its 2014 Outstanding Achievement in State Tax Reform award. The number of corporate tax bases, meaning the types of assets or activities that create tax liabilities, will be reduced from four to two, and the top tax rate will drop from 7.1 percent to 6.5 percent—New York’s lowest level since 1968.
Wisconsin began the 2014 legislative session with a budget surplus of $911 million. Rather than increase spending, Wisconsin returned $800 million—86 percent of the total—to its residents. Since Republican Governor Scott Walker took office in 2012, the state has reduced its tax burden by $2 billion.
I spoke to ALEC research analyst William Freeland, one of the report’s authors, and he was optimistic about the prospects for further tax cuts next year. “There will easily be 20 states in the next edition, and I would not be surprised if the number creeps up towards 25. I expect 2015 to be a landmark year for state tax reforms,” he said. Most states will be cutting their personal income taxes, according to Freeland, though passing corporate tax reform would also benefit the states.
Indiana is looking to build upon its recent, successful tax reforms. The state, under the leadership of Republican Governor Mike Pence, cut its personal income tax in 2013, and passed substantial corporate tax reforms this past year.
Tennessee, which already has no income tax on wages, though it does tax interest and dividends, could move to join Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming in completely eliminating its personal income tax.
Residents of Georgia, Arkansas, Nebraska, and Alabama could all see declines in their personal income tax rates. Legislators in these states have been planning for tax reform in 2015.
A lower, simpler, and fairer tax system attracts individuals from other states and encourages economic growth. More state governments are beginning to recognize this, and the prospects for state tax reforms in 2015 appear to be bright.
Jared Meyer is a fellow at Economics21 at the Manhattan Institute for Policy Research. You can follow him on Twitter here.