State Governments Continue to Cut Income Tax Rates
Although the prospect for taxation at the federal level is dismal, given the huge annual budget deficits of over $1 trillion as far as we can predict, the story at the state level is much different. Here’s an excerpt from David R. Henderson, “Cuts in Income Tax Rates Continue,” TaxBytes, Institute for Policy Innovation, July 5, 2023.
The progress since I last reported has continued. The state governments of Arkansas, Indiana, Michigan, Mississippi, Nebraska, North Dakota, and West Virginia have cut state income tax rates. Even Connecticut, whose Democratic governor, Ned Lamont, had to deal with a Democrat legislature, succeeded, with Republican support, in cutting all income tax rates except for the top rate paid by the highest-income people.
All of this matters for three reasons. First, as a moral matter, it’s important that people are able to keep more of their income. It’s theirs.
Second, even if cuts in tax rates cause state government revenue to be lower than otherwise, that will somewhat constrain the future growth in government spending. The reason is that, unlike the federal government, state governments can’t print money and almost all have some degree of a balanced-budget requirement.
Third, high income tax rates distort the economy, causing people to engage in tax avoidance (which is legal) and tax evasion (which is illegal.) Tax avoidance means not only aggressively finding legitimate deductions when you do your taxes; it also includes working less and making less money. Cutting tax rates reduces tax avoidance and tax evasion.
Read the whole thing, which is short.