8 States Making Tax Changes: Some Painful, Some Pleasant
Last November, California voters approved Proposition 30, a measure that imposes two separate tax increases. A quarter-percentage-point increase in the sales tax will affect everyone who shops within the state, but the measure also included an income-tax increase for single filers earning more than $250,000 and joint filers with $500,000 or more in income. Proposition 30 will add 1 to 3 percentage points to the existing top tax bracket through 2018, sending the maximum tax rate up to 12.3 percent. And the tax hike was retroactive, so filers will have to pay higher income taxes on the returns they're filing now.
Gov. Sam Brownback hasn't made a secret of the fact that he doesn't like the state's income tax. Last year, Kansas passed a law that took effect this year, reducing the top tax bracket from 6.45 percent to 4.9 percent. It also eliminated income taxes on small business income for hundreds of thousands of businesses. Now, Gov. Brownback is looking to send rates down even further, with the eventual goal of getting rid of income taxes entirely.
Gov. Bobby Jindal recently proposed a tax swap, offering to get rid of the state's income and corporate taxes in exchange for raising sales taxes. Critics argue that the shift could put too much burden on lower-income residents who can least afford it, but some policymakers argue that sales taxes promote savings and investment over consumption. One benefit from a higher sales tax: Louisiana's tourism industry would have visitors to the state paying a higher share of the overall burden.
Last year, the state legislature passed a law raising tax rates on high-income residents. Effective for the 2012 tax year, the new rates apply to single filers making more than $100,000 and joint filers above $150,000 in income. Rates in various brackets rose between one-quarter and three-quarters of a percentage point, with a new top rate of 5.75 percent.
Gov. Deval Patrick has proposed a plan that's the reverse of the Louisiana plan, offering to swap a one-percentage-point increase in the income tax rate to 6.25 percent, but lower sales taxes from their current 6.25-percent level to 4.5 percent. The move would bring Massachusetts more in line with other states within the region, with the governor saying that the net increase in tax revenue would help boost spending on education.
Along the same lines as Massachusetts, Minnesota Gov. Mark Dayton is trying to raise the state income tax rate to lower sales and property taxes. His proposal would reduce the sales tax rate from 6.875 percent to 5.5 percent and pay a $500 property tax rebate, but would add a new higher income tax bracket that would send the top rate up 2 percentage points to 9.85 percent. Recently, though, a lack of political support has raised the possibility that Gov. Dayton will drop at least part of his tax reform plans.
Like neighboring Kansas, Nebraska is considering getting rid of its income tax entirely. Gov. Dave Heineman has been promoting his tax-elimination plan, arguing that it's necessary in order to compete with border-states South Dakota and Wyoming, both of which have no income tax. Gov. Heineman would scale back on sales-tax exemptions in order to finance the income-tax reduction.
8. North Carolina
Legislators in the North Carolina Senate are also calling for tax reform, including the possible elimination of the state's income tax, where rates range as high as 7.75 percent. With nearby Florida having no income tax, North Carolina hopes that it can be more competitive both to individuals and businesses looking to relocate to the state.
Keep Your Eyes Peeled
Although many of these proposals are still in early stages of deliberation, you still need to keep watch on events as they develop. Otherwise, you could be in for a nasty surprise come tax time.
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