EspañolThis year has been a favorable one for taxpayers in 14 US states, whose governments cut tax rates to encourage economic growth and better compete with their neighbors. Moreover, both Republican and Democratic legislators were behind the push to reduce the drain on taxpayers’ pockets.
The “State Tax Cut Roundup” — authored by the Center for State Fiscal Reform of the American Legislative Exchange Council — praises tax relief in 14 jurisdictions, from New York to Nebraska and Arizona to Wisconsin. In fact, several states that lowered rates were repeat cutters, including Kansas, Florida, Indiana, and Ohio in both 2013 and 2014.
ALEC — a nationwide and nonpartisan association of state legislators — asserts that those states with fewer contributory demands of their citizens tend to have stronger economies than high-tax jurisdictions.
“Overall, the economic evidence strongly suggests that states with lower tax burdens and more economic freedom regularly outperform their higher tax and more restrictive counterparts,” reads the report led by Task Force Director Jonathan Williams.
ALEC uses the experience of the four biggest US states as an example. California and New York levy income tax on their residents, and have registered growth in real personal income of 62 percent and 41 percent since 1990. Texas and Florida, meanwhile, don’t tax personal income at all, and scored personal wealth increases of 125 percent and 79 percent respectively, with the national average at 65 percent.
— American Legislative Exchange Council (@ALEC_states) December 17, 2014
From Sea to Shining Sea
From New England to Arizona, the report details those states that have implemented cuts. Legislators in Indiana, for example, have passed a reduction of 7.5 to 4.9 percent tax on corporate income, and lowered personal property tax for business, saving approximately US$185 million annually.
Nearby in Missouri, legislators managed to overcome repeated vetoes from Democratic Governor Jay Nixon to cut income tax rates from 6 to 5.5 percent. Next door in Kansas, the state government continued a trend of tax overhaul from 2012, removing mortgage registration fees to save first-time buyers some $3 million annually.
Outlying Florida reduced motor license renewal fees, which go to general state coffers rather than funding transport-related policies, saving residents of the Sunshine State $20-25 each, or some $395 million annually.
Maryland, meanwhile, brought the level of exemption on the estate tax up from $1 million to $5.34 million, in line with the federal level by 2019. Estate taxes hit small businesses and farms particularly hard, the report asserts, since including assets such as machinery often means cash-poor family farms have to sell up.
Blue States Offer Surprises
In general, the tax reductions were less dramatic than those that took place in 2013. However, 2014 did bring some surprises, as traditionally Democratic-leaning states joined their GOP counterparts in bipartisan efforts to reduce estate and corporate taxes. Legislators recognized that such taxes bring in minimal revenue; Pennsylvania recoups only 2.4 percent of the state budget from estate taxes, and that is the highest in the country.
New York state has long been losing income and businesses to other states with lighter tax regimes, ranking dead last in ALEC’s annual “Rich States, Poor States” report in April. Yet 2014 reforms to the corporate tax structure saw a reduction in the number of graduated corporate tax brackets from four to three, and decreasing rates by 0.6 percent to 7.1 percent. These were accompanied by measures to relieve homeowners from property taxes, and may help to stem the drain of business from the Empire State.
Rhode Island, meanwhile, went against a tradition of high taxes to cut corporate rates from 9 percent to 7 percent, and raise the estate tax threshold to $1.5 million from the current level of $922,000 — a measure that will save residents $18 million by budget year 2015-6.
ALEC promotes “limited government, free markets, [and] federalism.” With this report, they reiterate their support for simple, transparent, pro-growth policies that don’t leave citizens laboring under paperwork or scratching their heads over where the next imposition will be coming from.
“The proper function of taxation is to raise money for core functions of government,” the report states, “not to direct the behavior of citizens or close budget gaps created by overspending … policymakers should resist the temptation to use the tax code for social engineering.”
“Creating a tax and fiscal policy climate conductive to economic growth should be a top priority for every state. Hopefully, the example set by these reforms, and their economic results over time, will persuade other states to pursue pro-growth tax reform in the coming legislative session,” the report concludes.
Fergus Hodgson contributed to this article.