Many states rang in the new year with changes to their tax codes. Overshadowed in the public consciousness by federal taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform, tax changes at the state level are nonetheless highly significant. Here are the key changes implemented at the state level on January 1, 2018.
- Connecticut: Large businesses have long faced a 20 percent surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. on the state’s standard 7.5 percent corporate rate, bringing the top marginal rate to 9 percent. On January 1, the surtax dropped to 10 percent, bringing the top marginal rate to 8.25 percent. This reduction was part of the extension of the surtax adopted in 2015.
- Delaware: The Delaware estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. has been repealed effective January 1, thanks to legislation signed last year implementing a recommendation of a state advisory committee.
- Hawaii: After allowing temporary income tax increases to expire last year, Hawaii has reimposed its formerly temporary rates on a permanent basis, reinstating three brackets and raising the top marginal rate from 8.25 to 11 percent, coupled with the adoption of a nonrefundable state-level earned income tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (EITC) at 20 percent of the value of the federal credit.
- Mississippi: Mississippi begins phasing in a range of tax reforms adopted in 2016, including phasing out the 3 percent individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate (by exempting, this year, the first $1,000 of income, phasing out the bracket entirely by 2022) and creating a deduction for a portion of the federal self-employment tax. The first $100,000 of capital value is now exempt from the state’s franchise tax as well, after which the franchise tax will begin to phase out through 2028.
- New Jersey: The estate tax is gone—for now. In 2016, Gov. Chris Christie (R) negotiated a tax reform deal with Democratic legislative leaders which raised the gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. but set the estate tax on a two-year phaseout. Incoming Gov. Phil Murphy (D) opposed repeal and may seek to restore the tax for tax year 2018.
- New Mexico: In the culmination of a multiyear phasedown, New Mexico reduced its top corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate from 6.2 to 5.9 percent on January 1. The top rate was 7.6 percent in 2013.
- New York: The state continues to phase out its franchise tax, with the rate declining to 0.075 percent on January 1 and full repeal anticipated for 2021.
- Tennessee: Although Tennessee forgoes a wage income tax, it does impose a tax—called the Hall Income Tax—on interest and dividend income. That tax is being phased out, with the rate dropping from 4 to 3 percent on January 1. Full repeal is scheduled for 2021.
- District of Columbia: The final phase of the District’s 2014 tax reform package went into effect on January 1, including increases to the individual income tax standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. and personal exemption, a corporate franchise tax rate reduction (from 8.75 to 8.25 percent), and a higher estate tax threshold.
Several states also adjusted their motor fuel taxes, including: California, which not only raised fuel tax rates dramatically but also changed how fuel taxes are assessed; Florida, which modestly increased both the state levy and the lowest possible local levy; and Oregon, which increased its rate by 2 cents per gallon.
The enactment of federal tax reform should increase revenues for most states, but also provides an impetus for states to take a closer look at their own tax codes. Click here for a list of state tax trends that are likely to continue this year.
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