State Legislatures Take Up Tax Reform in 2022

From: Tax Foundation

If 2021 was a big year for state tax reform, 2022 may give it a run for its money. With January now in the books, the 40 states which have convened their legislative sessions—six more will join them, while four states’ legislatures do not meet in odd-numbered years—already show a flurry of activity on taxes, with arrows almost invariably pointing toward tax reform and tax relief.

With 7,383 state legislators and about 100,000 bills introduced each year, it’s possible to find introduced legislation doing almost anything, and sometimes in the early stages of session, it can be difficult to determine which proposals should be taken seriously and which will fall by the wayside. Nevertheless, it’s worth surveying the landscape to see which bills are garnering attention and, in some cases, already moving rapidly through legislative bodies. No such list could possibly be exhaustive—any given state likely has more introduced bills on tax-related subjects than are covered in this entire review—but here’s what we’re following as we look toward February.

Individual income tax rate reductions are the most common proposal. At present, 13 states have legislation worth watching that would cut individual income tax rates: Colorado, Idaho, Indiana, Iowa, Michigan, Mississippi, Missouri, Nebraska, New York, Oklahoma, South Carolina, Utah, and West Virginia. Additionally, nine states—with significant overlap—have noteworthy proposals to cut corporate income taxes: Colorado, Idaho, Indiana, Iowa, Kansas, Michigan, Missouri, Pennsylvania, and Utah. Both lists are likely to grow as sessions continue.

Meanwhile, five states—Connecticut, New Mexico, Tennessee, Washington, and West Virginia—have legislation or governor’s proposals to cut sales tax rates. While most, but not all, of the proposals to cut income taxes are championed by Republicans, all five serious efforts to cut sales taxes have come from Democratic lawmakers. Both Republicans and Democrats, however, have proposed exempting groceries from sales tax bases, or expanding current exemptions, in Alabama, Colorado, Illinois, Kansas, and Mississippi.

Thus far, meaningful efforts to raise taxes—excluding proposals for net tax cuts which have partially offsetting rate increases elsewhere—have been proposed in only two states, Hawaii and Massachusetts. Given robust revenue growth (state tax collections rose 21 percent last year) and projections of significantly higher revenue for the foreseeable future, most states are exploring ways to return some of their increased revenue to the taxpayers.