Individual Income Tax Insights: With an Eye on Federal Tax Reform, States Are Making Major Changes

Over the last several months, federal tax reform and its impact on the states have been hot topics of conversation. The conversation has been focused on how to simplify the federal tax code and lower federal income tax rates, leaving states to resolve conformity issues. Meanwhile, several states are discussing or implementing individual income tax reforms of their own, and lowering the rates doesn’t seem to be a priority.

The state making the most drastic changes to its income tax is Kansas. On June 6, the Kansas legislature overrode a veto by Gov. Sam Brownback (R) to enact legislation making major reforms to the state’s tax code, as reported by Christopher Brown in Bloomberg BNA’s Daily Tax Report: State (subscription required).   

In enacting S.B. 30, the Kansas legislature dissolved the tax cuts championed by Brownback in 2012. This legislation reinstates a third tax bracket for individuals with taxable income greater than $60,000 and retroactively removed an exemption for income earned by pass-thorough entities, among other changes.

But why is Kansas raising its tax rates when so much of the federal tax reform discussion has been focused on just the opposite? 

The answer to that question lies in a two-year projected budget shortfall of $900 million, according to an NPR article. By reversing the 2012 tax cuts, which are widely blamed for the deficit, the legislature is removing the source of the shortfall while generating new revenue to close the gap.  

One of the significant impacts of the cuts’ recent dip in popularity is the number of Republican legislators abandoning them, according to an article in The Washington Post. This lack of party support contributed to the state’s Republican-controlled legislature overriding the state’s Republican governor’s veto of S.B. 30.      

Kansas might be the most extreme example of states taking drastic measures in raising income taxes to address budget shortfalls, but it is not the only one. 

The institution of an income tax has been an ongoing debate in Alaska over the last several years as falling oil prices have severely impacted the state’s collection of severance taxes. In hopes of bridging the gap between the tax’s supporters and opponents, Gov. Bill Walker (I) recently suggested lower the proposed income tax rate, as reported by Alaska Dispatch News.

Massachusetts is also throwing its hat into the ring. The Legislature recently voted to allow a ballot question seeking to implement a surtax on income earned by individuals in excess of $1 million, as reported by MASSLIVE.com. The measure to amend the state’s constitution to allow the surtax will appear on next year’s ballot. The article notes that the ballot initiative may be contested on constitutional grounds prior to making it to the state’s voters.

While Connecticut may potentially gear up for future tax reform, it is having a much different conversation regarding its income tax than the states previously discussed. Connecticut trails only New York in terms of state and local income tax per capita, according to the Tax Foundation.

The state’s individual income tax has been blamed for running high-net worth individuals and businesses out of the state since it was enacted. That is why one gubernatorial hopeful’s platform includes the repeal of the individual income tax, according to the CT Post. 

So even though federal tax reform is dominating the headlines, tax reform junkies should keep an eye on the states while they wait. 

*Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: Is increasing the individual income tax the proper way to address budget issues?

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