11 States Make Pro-Growth Moves on Taxes – 8 States Veer in Opposite Direction

By SBE Council at 26 January, 2023, 1:35 pm

by Raymond J. Keating –

At best, Congress and the White House have been dithering in terms of implementing pro-growth policies. At worst, and far closer to the truth, Washington has been pushing an anti-growth agenda, including higher taxes, more regulation, protectionism and more government spending.

However, there are examples of elected officials making positive contributions. Where? In certain states. Consider some key tax changes that went into effect at the start of this year.

Arizona moved from a two-rate income tax, with rates of 2.55 percent and 2.98 percent, to a flat rate of 2.5 percent in 2023.

Arkansas’s corporate income tax rate declined from 5.9 percent to 5.3 percent.

Idaho cut its individual income tax rate from 6 percent to 5.8 percent.

Indiana cut its individual income tax rate from 3.23 percent to 3.15 percent, with a phase down that could lower the rate of 2.9 percent in 2029.

Iowa went from a personal income tax with nine brackets and a top rate of 8.53 percent to four brackets with a top rate of 6 percent. The number of brackets and top rate will continue to decline until hitting a 3.9 percent flat tax in 2026. In addition, Iowa’s corporate income tax rate went from three brackets with a top rate of 9.8 percent to two brackets and a top rate of 8.4 percent.

Kentucky reduced its individual income tax rate from 5 percent to 4.5 percent. If certain revenue triggers are met, the rate should decline to 4.0 percent in 2024.

Missouri cut its top individual income tax rate from 5.3 percent to 4.95 percent.

Nebraska reduced its highest individual income tax rate from 6.84 percent to 6.64 percent in 2023, with the rate scheduled to phase down to 5.84 percent in 2027.

New Hampshire has no general personal income tax, but it does impose an income tax on interest and dividends. That rate declined from 5 percent to 4 percent on its way to being phased out by 2027. Also, the state’s corporate income tax rate was cut from 7.6 percent to 7.5 percent.

North Carolina dropped its individual income tax rate from 4.99 percent in 2022 to 4.75 percent in 2023.

Pennsylvania reduced its corporate income tax rate from 9.99 percent to 8.99 percent, with the rate scheduled to be phased down to 4.99 percent by 2031.

Chasing Away and Wiping Out Wealth thru Destructive Taxation

Unfortunately, there are state lawmakers looking to take their states in the wrong direction or do more damage to their already inhospitable tax climate. As The Wall Street Journal (WSJ) editorial page recently noted, there are 8 states – i.e., California, New York, Illinois, Maryland, Hawaii, Minnesota, Connecticut and Washington state – seeking to impose wealth taxes of one kind or another.

For example, the idea in California, according to the WSJ, would be to “take 1% a year from households worth more than $50 million and 1.5% from those worth more than $1 billion. This is a grab for the fortunes of tech entrepreneurs who have already filled Sacramento’s coffers with payments on income and capital gains.”

Illinois would tax unrealized capital gains as income. And in New York, “State Sen. Gustavo Rivera introduced a bill to increase the state’s 10.9% top capital-gains tax rate, adding 7.5 percentage points for households earning more than $550,000 and another 7.5 points for those above $1.1 million.”

Such taxes, of course, come on top of federal levies.

These destructive proposals ignore basic economics. In fact, they are designed, whether lawmakers intend it or not, to undermine economic growth, by chasing away entrepreneurship and investment. And make no mistake, this very much is about taxing small business.

As SBE Council has noted before in our efforts to defeat similar proposals at the federal level, CNBC reported: “The 1% [in total wealth] own 57% of private companies, according to the Federal Reserve.” CNBC quoted Edward Wolff, professor of economics at New York University, pointing out the following about the wealthiest: “Small business is really key when you talk about the sources of their wealth.”

These 8 states serving up class warfare measures meant to punish top income earners naturally would spread economic destruction far and wide, and provide additional incentives for people to move to far less punishing states. Keep in mind that states like California, New York and Illinois already rank among the top states for exporting people to other states.

Federal Policy Needs to Support Entrepreneurship and Wealth Creation   

Turning briefly to federal policies, if 11 states can take pro-entrepreneurship, pro-small business, pro-investment – that is, pro-growth – policy steps, then why can’t federal elected officials do the same? Well, since the states often are referred to as laboratories of democracy, federal lawmakers can just as easily look to wrongheaded and destructive experiments in the states for inspiration, such as the wealth tax ideas pushed in the aforementioned 8 states considering anti-growth tax measures.

In the end, it’s about choosing to align policy with sound economics or not. The question for policymakers is: Do you want to incentivize wealth creation – and all of the resulting benefits that spread far and wide across all of the economy, including economic, income and employment growth – or incentivize wealth destruction?

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.