State Tax Trends #2: Income Tax Reforms

June 14, 2012

We've identified the top ten key tax trends among the states in recent years. We're sharing them with a short report each weekday with data and analysis on each trend. We hope this information will help you learn how states responded to the recession, how they're faring now, and how prepared they are for the future. The series kicked off last week with an overview of state budgets and state tax changes during 2011

Our #2 trend, released in today's report (PDF), are income tax reforms. Some highlights from the report:

  • Over the past five years, more than 20 states have made significant changes to their income tax systems.

  • While a few of these states have increased both rates and complexity in a search for more revenue, several others – such as Utah and Rhode Island – have had great success in lowering their income tax rates.

  • The key income tax reform accomplishment during the recent recession occurred in Rhode Island, which for many years had a 5-bracket income tax with a top rate of 9.9 percent. Continued bipartisan pressure to do something about Rhode Island’s poor economic performance and tax system complexity led to further reform in 2010 that took effect in January of 2011. The reform was designed to be revenue-neutral and actually increase progressivity, while dramatically reducing compliance costs and barriers to economic growth. Although the income tax changes are still new, their tax reform will greatly boost the state’s competitive position.

  • While completed success stories are few and far between, reform proposals are becoming increasingly popular, showing up in Maine, Georgia, Kansas, Arizona, and South Carolina. 

  • With taxes a top election issue at both the national and state levels, now is the right time for states to begin discussing how they can improve their prospects by moving toward broader bases and lower income tax rates.

If you'd like us to e-mail you these and all other Tax Foundation reports on state taxes, be sure to subscribe to our State Tax Fiscal Policy Reports and Releases e-mail list at http://taxfoundation.org/tax-foundation-e-mail-updates.

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