Thanks to federal aid over the last year, most state government budgets have recovered from the pandemic and many have surpluses that have prompted them to cut taxes.
In 2021, 11 states have cut individual and/or corporate income taxes. Ten of these states have cut individual income tax rates while five have lowered corporate rates, according to a report by the Tax Foundation.
Other states are also looking at rate cuts, including income taxes and phasing out corporate tax rates in the next ten years, while others focus on sales tax rate increases.
While tax cuts are attractive to businesses and consumers, they have different impacts on state budgets. Corporate income taxes account for less than 7% of state revenues on average, according to the National Association of State Budget Officers (NASBO).
“Corporate income taxes are also extremely volatile, are harder to audit and more difficult to administer,” said tax firm Vertex’s chief tax officer Michael Bernard. “Gradually you’ll see over the next few years some states phasing out those taxes entirely,” he added.
But personal income taxes play a much bigger role in state budgets: they make up more than 42% of revenue on average, according to NASBO.