2021 Tax Changes in the States

By at 21 January, 2021, 1:38 pm

by Raymond J. Keating-

For better and for worse, 2021 promises to serve up some big policy changes from Congress and the White House. But that process is already underway in various states – again, for better and for worse.

Consider some key state tax changes affecting entrepreneurship, small business, working, and competitiveness.

Arizona. Small businesses, entrepreneurship and competitiveness took a big hit in Arizona this past Election Day when voters approved a major tax increase. The top individual income tax rate, as of January 1 of this year (if it survives a court challenge) increased 4.5 percent to 8 percent – a 78 percent increase in the rate – applied to incomes of more than $250,000 for single payers and $500,000 for those filing jointly. And those top rate thresholds are not indexed for inflation.

Arkansas. There was good news for income earners, including small businesses, in Arkansas at the start of 2021. The top individual income tax rate dropped from 6.6 percent to 5.9 percent (the former top rate of 6.6 percent was imply eliminated). More good news came on the corporate income tax front as well, with the rate reduced from 6.5 percent to 6.2 percent.

Connecticut. Businesses and workers face a new 0.5 percent payroll tax in Connecticut, with revenue to be used for the state’s paid family and medical leave program.

New Mexico. New Mexico hit individuals, entrepreneurs and small businesses with a major tax increase on January 1. The top individual income tax rate was increased from 4.9 percent to 5.9 percent for single earners making more than $210,000 and $315,000 for joint filers. With a 50 percent exclusion in effect, that means that the state’s individual capital gains tax rate increased from 2.45 percent to 2.95 percent.

Tennessee. While Tennessee does not have a general personal income tax, there was a tax imposed on interest and dividend earnings. However, that tax was being phased out, and it disappeared on January 1. That’s a big plus for the Volunteer State.

The key points regarding tax policy remain straightforward from an economics perspective. That is, increased state taxes – especially on income – reduce incentives and resources available for productive economy activity, such as starting up, building and investing in businesses; diminish a state’s competitiveness; and enhance resources controlled by government, with its incentives to make decisions according to politics and its overwhelming bias for waste.

Elected officials (and voters) in states like Arizona, Connecticut and New Mexico that have increased taxes this year are making the road to economic recovery and growth in their states more difficult, while moves in Arkansas and Tennessee are real plusses.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.





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