Individual Income Tax Insights: States Propose Income Tax Changes for the Rich and Poor

There has been a lot of focus on the individual income taxes imposed by the states recently. We’ve seen states try to implement an income tax, change a flat tax to a graduated system, and ask if their billionaires are moving away to pay less. 

By and large these income tax conversations are generally driven by a state’s budget. However, the process can be incredibly complex. There are a number of issues that can come to the forefront when states begin to amend their tax systems, not the least of which is who will bear the burden.

In a handful of states there is a possibility that the income tax rate for the wealthy will be increasing. Colorado, Maine, and Minnesota may all put forth ballot initiatives this year that will have the effect of increasing the marginal tax rate of their most well-to-do taxpayers, as reported by James Nash in Bloomberg BNA’s Daily Tax Report. There is also discussion in California of extending the 2012 rate increase for taxpayers with income in excess of $1 million that is set to expire in a few years, the article states.

However, these types of initiatives are not without their opponents. The California Chamber of Commerce has already come out in opposition of the possible rate extension, according to the Los Angeles Business Journal. Opponents may also point to Connecticut, where the state’s income tax system is being at least partially blamed for motivating two billionaires to leave the state, according to the Hartford Courant.

It isn’t just the wealthy that can be affected by income tax changes. In Oklahoma, legislation was recently sent to the Governor for approval that would make the Earned Income Tax Credit (EITC) nonrefundable, as reported by News OK. This will have an effect on low- to moderate income taxpayers. The EITC is a credit only available to taxpayers who work but earn an income below a certain threshold.    

If enacted, this bill would allow taxpayers to continue to offset their tax liability with the credit, but any excess credit amount would no longer be refunded. This measure is aimed at saving the state over $28 million a year, according to News OK.

These discussions go to show that individual income tax changes can have wide ranging effects on all taxpayers, regardless of personal wealth. They also show just some of the many complexities and questions states must reconcile when making these changes.

*Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: What is the best way for states to generate revenue while limiting the fiscal impact on its citizens?

For more information about individual income taxes, check out Bloomberg BNA’s Individual Income Tax Navigator by signing up for a free trial of the Bloomberg BNA Premier State Tax Library today.