New changes in state taxes

  • 2 January 2018
  • NormanL
New changes in state taxes

Even as the federal tax reform law takes effect, bringing with it lower tax bills for millions of Americans, states have been tinkering with their tax odes as well. In some cases, the results are tax increases, either for individuals or businesses. The Tax Foundation has a run down on some key changes that went into effect on January 1:

Connecticut: Large businesses have long faced a 20 percent surtax 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Delaware: The Delaware estate tax has been repealed effective January 1, thanks to legislation signed last year implementing a recommendation of a state advisory committee.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 credit (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 tax 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 tax 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 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 deduction and personal exemption, a corporate franchise tax rate reduction (from 8.75 to 8.25 percent), and a higher estate tax threshold.

A number of states also tweaked their taxes on fuel (upwards, in the instances noted by the Tax Foundation). We are struck by the number of states that decided to raise taxes on their residents in light of the new federal tax law.

One of the new law's key features is to cap the amount of state and local taxes individuals can deduct on their federal forms. While the high tax states (almost uniformly run by Democrats), have complained mightily about the federal cap, they have been given a choice: reduce their own tax rates, and save their residents the added burden, or watch many of those residents flee to lower tax states. 

Whether the federal tax reform law results in a great "tax migration" in the next few years is something we will watch closely.