Individual Income Tax Insights: Individual Income Taxes Are Leading States to Ask Existential Questions


 

To impose an individual income tax or not to impose an individual tax—that is the question. Whether ‘tis nobler in the mind to raise revenues by taxing the income of your citizens, or to find new ways to take arms against a sea of state expenses, and by replacing the revenue, end them.

Much like Shakespeare’s Hamlet, a number of states seem to be facing an existential crisis. Regardless of whether state revenues are high or low, few issues are as divisive as taxes. This is especially true for the individual income tax.

Alaska, one of seven states not currently imposing an income tax, happens to find its self on the low end of the spectrum. The state is currently facing a deficit of nearly $3 billion, according to an article from KTVA Alaska. This has led to a handful of proposals over the last year, the most current of which, H.B. 115, calls for the institution of an individual income tax in addition to other major changes.

One expert believes that Alaska’s proposed income tax will generate over $6.5 million annually, but warns that it has the potential to adversely affect thousands of jobs in the state, the article noted. The bill, for which open hearings have recently been held, is currently in front of the state legislature’s Finance Committee.

In Michigan, the debate surrounding the individual income tax has been floating through the halls of the statehouse, much like the specters of a fallen king lurk along the walls of a certain castle in Denmark.

Although Michigan was asking the same fundamental question as Alaska—do we need an individual income tax?—the reasoning was the complete opposite. Michigan, which currently imposes an income tax and is not currently facing a major budget crisis, was debating a reduction to its tax.

That debate recently came to an end, as reported by Michael J. Bologna of Bloomberg BNA’s Weekly State Tax Report. H.B. 4001, could not pass the Michigan House of Representatives, losing by a vote of 52-55. The bill, which originally called for a complete phase-out of the tax over the next 40 years, was amended to reduce the state’s income tax by a little more than a quarter of a percent. One of the primary concerns surrounding the reduction was the lack of a revenue replacement, the article stated.

However, many believe that the individual income tax is rotten in more states than just Alaska and Michigan. Utah, Georgia, Missouri and Kansas are all facing recent proposals to amend their versions of individual income tax.

This all goes to show: to tax or not to tax is the question, but the answer is anything but simple.

Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: Should states with budget surpluses reduce or repeal their individual income taxes?

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