Tax Changes Taking Effect January 1, 2019

Tax Policy – Tax Changes Taking Effect January 1, 2019

Champagne will flow, Auld Lang Syne will be sung, resolutions will be made (and soon forgot, and never brought to mind), and, in a handful of states, taxes will change.

There is less January 1st activity than we usually see, but this does not mean 2018 was a quiet year. Rather, state consideration of tax conformity after the enactment of the Tax Cuts and Jobs Act (TCJA) of 2017 moved many changes forward, with rate reductions and other adjustments adopted midyear made retroactive to the start of the year. For instance, Idaho, Utah, and Vermont all trimmed income tax rates this year—but made them effective January 1 of 2018, not 2019.[1]

This was also a significant year for ballot measures, but some of the changes approved by the voters will take time to go into effect. Voters approved the legalization and taxation of marijuana in both Michigan and Missouri, but marijuana won’t go on sale in these states on January 1st.[2] Lawmakers and regulators still have work ahead of them before the new regimes go into effect.

Finally, many legislatures postponed at least some elements of their conformity considerations to 2019. In some cases, they didn’t update their conformity statutes at all. In others, states punted on what to do with the new revenue and will have to decide in 2019 whether to return it in the form of tax reform or other tax relief, or whether to add it to the budget baseline.

So while this January 1st will be a little quieter than usual on the tax front, there is no reason to expect anything less than a frenetic pace in the new year. Here are the significant tax changes taking effect on January 1, 2019.

In Arkansas, low-income tax relief legislation goes into effect on January 1st. Arkansas is unique among states inasmuch as it has three entirely different rate schedules depending on total taxable income. As taxpayers’ income rises, they not only face higher marginal rates but also shift into entirely different rate schedules. In the new year, the top rate for the lowest schedule (for income between $12,600 and $20,999) will decline from 4.4 to 3.4 percent, with lower brackets seeing rate reductions as well. The lowest bracket (the first $4,299 of taxable income) of the next rate schedule, for filers earning between $21,000 and $75,000, also sees a rate cut, from 0.9 to 0.75 percent.[3]

Note: the exact brackets will change slightly due to Arkansas’s policy of inflation-adjusting its brackets annually. Source: Act 78, Arkansas 2017.

Total Income Under $21,000   Total Income Between $21,000 and $75,000   Total Income Above $75,000
Income Bracket Tax Rate Income Bracket Tax Rate Income Bracket Tax Rate
Individual Income Tax Rates (2019)
$0-$4,299 0.0%   $0-$4,299 0.75%   $0-$4,299 0.9%
$4,300-$8,399 2.0% $4,300-$8,399 2.5% $4,300-$8,399 2.5%
$8,400-$12,599 3.0% $8,400-$12,599 3.5% $8,400-$12,599 3.5%
$12,600-$20,999 3.4% $12,600-$20,999 4.5% $12,600-$20,999 4.5%
  $21,000-$35,099 5.0% $21,000-$35,099 6.0%
$35,100-$75,000 6.0% $35,100+ 6.9%

In Georgia, both the corporate rate and the top marginal individual income tax rate will decline from 6.0 to 5.75 percent on January 1st to offset additional revenue due to the base-broadening provisions of the TCJA. Because many of those federal provisions are temporary, these state rate reductions have a sunset provision, expiring at the end of 2025 (when individual income tax changes are scheduled to sunset at the federal level).[4]

In Mississippi, a franchise tax phasedown which began in 2018 (with the implementation of a small exemption) continues with a rate reduction, from 2.5 to 2.25 mills, as of January 1, 2019. The tax will slowly phase out through 2028. The amount of federal self-employment taxes individuals can deduct is also slated to rise in 2019.[5]

In Missouri, the first stage of a recently-adopted tax reform package will take effect with the elimination of one bracket of the state’s individual income tax and the reduction of the top rate from 5.9 to 5.4 percent. This will be paired with a phased reduction in the ability of high earners’ ability to claim a deduction for federal taxes paid and a cap on the expansion of the state’s tax preference for pass-through income. Further reform is slated for 2020, when shifting to a unitary apportionment factor (companies currently get their choice of single sales factor or three-factor apportionment; in 2020, nearly all companies will be subject to single sales factor apportionment) will permit a reduction in the corporate rate, from 6.25 to 4.0 percent.[6]

In New Hampshire, the state’s two business taxes will see rate reductions for the second year in a row. Legislation adopted in 2017 phases in reductions of the business profits tax (BPT, the state’s corporate income tax) and the business enterprise tax (BET, a kind of value-added tax). In 2018, the BPT declined from 8.2 to 7.9 percent and the BET from 0.72 to 0.675 percent. On January 1, 2019, the rates decline further, to 7.7 and 0.60 percent respectively.[7]

In North Carolina, the individual income tax rate will decline from 5.499 to 5.25 percent, while the corporate income tax rate will be trimmed from 3.0 to 2.5 percent, the nation’s lowest corporate rate,[8] as the state continues to meet revenue targets. Although no further reductions are currently scheduled, some legislators are already beginning to contemplate repealing the tax outright in coming years. Although North Carolina’s corporate income tax is now extremely competitive, the state does still have a large capital stock tax on the books.

And Georgia, Iowa, Louisiana, Nebraska, and Utah are all scheduled to begin collecting sales taxes from remote sellers as of January 1, joining 20 states which already do so.[9]

The coming year promises to be an active one in the realm of tax policy. With issues like the taxation of marijuana and sports betting coming to the fore and the taxation of remote sales increasingly within states’ reach, along with the ongoing ripple effects of federal tax reform, January’s rate changes are only the beginning.

Notes


[1] Vermont Acts & Resolves, Act 11, 2018 Special Sess.; Utah Code Annotated § 59-10-104; Jared Walczak, “Two States Cut Taxes Due to Federal Tax Reform,” Tax Foundation, March 19, 2018, https://taxfoundation.org/two-states-cut-taxes-due-federal-tax-reform.

[2] Joseph Bishop-Henchman, Jared Walczak, and Katherine Loughead, “Results of 2018 State and Local Tax Ballot Initiatives,” Tax Foundation, Nov. 6, 2018, https://taxfoundation.org/2018-state-tax-ballot-results/.

[3] Nicole Kaeding, “Tax Cuts Signed in Arkansas,” Tax Foundation, Feb. 2, 2017, https://taxfoundation.org/tax-cuts-signed-arkansas/.

[4] Georgia House Bill No. 918, Georgia 154th General Assembly, 2017-2018 Reg. Sess.

[5] Joseph Bishop-Henchman, “Mississippi Approves Franchise Tax Phasedown, Income Tax Cut,” Tax Foundation, May 16, 2016, https://taxfoundation.org/mississippi-approves-franchise-tax-phasedown-income-tax-cut/.

[6] Jared Walczak, “Missouri Governor Set to Sign Income Tax Cuts,” Tax Foundation, July 11, 2018, https://taxfoundation.org/missouri-governor-set-sign-income-tax-cuts/.

[7] New Hampshire Department of Revenue Administration, “Business Tax Data,” https://www.revenue.nh.gov/transparency/business-tax.htm.

[8] North Carolina Session Law 2017-57.

[9] Joseph Bishop-Henchman, Hannah Walker, and Denise Garbe, “Post-Wayfair Options for States,” Tax Foundation, Aug. 29, 2018, https://taxfoundation.org/post-wayfair-options-for-states/.


Source: Tax Policy – Tax Changes Taking Effect January 1, 2019

The Impact of Tax Cuts on Arkansas Households

Tax Policy – The Impact of Tax Cuts on Arkansas Households

The Arkansas Tax Reform and Relief Task Force concluded its work earlier this month, referring several tax changes to the General Assembly for its consideration in January when the legislative session begins. Amidst the flurry of activity, it’s difficult for everyday Arkansans to know how these tax reforms will impact their budget and their tax bills.

We have constructed seven sample taxpayers in Arkansas, using a combination of family sizes, income levels, and filing status to illustrate how the individual income tax changes in the task force’s recommendations, known as the “2/4/5.9% Plan,” impact Arkansas families. These changes do not include the impact of any other tax changes, such as the business-side changes or any accelerated economic growth that could be spurred by the plan.

Impact of Tax Cuts on Arkansas households, tax savings under 2019 Arkansas tax reform. Arkansas tax cuts

As the illustrations above show, individuals at a variety of income levels would see tax cuts due to the proposed changes. However, those tax cuts appear to be skewed towards higher-income individuals. The sample taxpayers with incomes in excess of $100,000 receive the tax cut change when comparing total tax liability change, percent of tax liability change, and change in after-tax earnings.

But this doesn’t show the entire picture. Arkansas has implemented individual income tax cuts in three distinct phases. First, in 2015, it passed tax cuts for individuals with incomes between $21,000 and $75,000. Second, in 2017, it passed tax cuts for individuals with incomes below $21,000. (Single individuals with income below $11,969 have no income tax liability due to Arkansas’s low-income tax credit first adopted in 1991 and expanded in 2007.) So, this final plan brings those with incomes above $75,000 closer to the cuts already passed in 2015 and 2017, and returns Arkansas to a single set of tax brackets as it had in 2015. (Since then there have been three sets of brackets.) To better illustrate that, we have calculated tax cuts for the same sample taxpayers for all the individual income tax cuts since 2015. Here, things look more proportional as a percent of after-tax earnings.

Impact of Tax Cuts on Arkansas households, tax savings since 2015. Arkansas tax cuts

Since 2015, all filers, except for Brittany (whose tax liability has always been $0), received a tax cut, with the largest tax cut going to Jerome and Patty, who had an income of $25,000. Adam and Christine received the largest tax cut in total dollars, $2,121.66, but that is because their income is the largest. Instead, it is better to compare the tax cuts based on a percentage of tax liability or income. Jerome and Patty saw a tax savings of almost 61 percent, or 1.2 percent of their income. For comparison, Adam and Christine saw a tax cut of 14.2 percent of their tax liability, or 0.8 percent of their income. Jerome and Patty saw a much larger tax cut proportionally.

Calculation Assumptions

For our calculations, we used the Arkansas tax system as it exists on both January 1, 2015 and January 1, 2019. For the 2019 calculations, these are after the scheduled phase-in of the low-income tax changes effective on January 1. We assumed all filers used the standard deduction, for simplicity and comparisons, and we did account for the more than tripled standard deduction under the “2/4/5.9% Plan.” These calculations assume the rate structure under the “2/4/5.9 Plan” when it’s fully phased in. The task force is currently debating how quickly to phase in the marginal rate changes under the plan.

These calculations do not include any other tax changes, such as taxing online transactions under a sales tax, other sales tax base changes, or any business-side changes.


Source: Tax Policy – The Impact of Tax Cuts on Arkansas Households

Charitable Deductions by State

Tax Policy – Charitable Deductions by State

As the end of 2018 approaches, many Americans are considering making end-of-year charitable donations. While the new tax law contains many changes that will impact these decisions, we can look at Internal Revenue Service (IRS) data to gauge how much Americans have deducted for charitable giving in the past.

In tax year 2016, just over 37 million taxpayers took an itemized deduction for their charitable giving, deducting a total of $236 billion in charitable contributions for an average of $6,349. Note that this doesn’t represent the total amount of giving in the United States, just the amount that eligible taxpayers deducted on their income tax returns. It’s also worth noting that wealthier Americans disproportionately benefit from the charitable deduction overall, as it is high-income taxpayers who tend to itemize their deductions.

average charitable deduction, charitable deduction state rankings

Four states had average charitable deductions greater than $10,000 in 2016: Wyoming ($12,991), Arkansas ($10,935), Utah ($10,165), and South Dakota ($10,019). The state with the smallest average, at $3,354, was Rhode Island.

Because the Tax Cuts and Jobs Act greatly increased the standard deduction, it’s estimated that nearly 30 million households will be better off taking the standard deduction instead of itemizing. While this means tax filing will be simpler, it also means these households will no longer benefit from the charitable contribution deduction.

Lower marginal tax rates under the new law also mean that, for those still taking itemized deductions, their value is lessened. While charitable giving will still be subsidized for these taxpayers, it will be subsidized to a lesser extent.

As millions fewer households will itemize going forward, we should expect forthcoming IRS data to show fewer charitable contribution deductions. What this means for charitable giving overall, however, is less certain. Though some households may decrease their giving, others may use new strategies, such as bunching their donations, or maintaining their giving by making multiple years’ worth of donations at once to have enough to itemize. Given that the tax subsidy for charitable donations has decreased, it would not be surprising if tax-motivated charitable giving decreases as well. However, households make giving decisions for a variety of reasons, many of which are not tax related.

Source: Internal Revenue Service Statistics of Income, Table 2.  Individual Income and Tax Data, by State and Size of Adjusted Gross Income, Tax Year 2016, author calculations

State

Rank

Number of Charitable Deductions

Amount of Charitable Deductions (in millions)

Average Charitable Deduction

Alabama 9 470,090 $3,546 $7,542.61
Alaska 28 57,090 $327 $5,729.72
Arizona 37 729,580 $3,701 $5,072.62
Arkansas 2 224,470 $2,455 $10,935.32
California 13 5,154,350 $36,634 $7,107.46
Colorado 24 713,080 $4,269 $5,986.40
Connecticut 31 607,150 $3,319 $5,466.78
Delaware 45 122,180 $558 $4,565.17
D.C. (7) 113,460 $912 $8,038.71
Florida 14 1,854,220 $13,087 $7,057.78
Georgia 7 1,261,830 $10,151 $8,044.67
Hawaii 48 163,170 $671 $4,111.80
Idaho 16 173,440 $1,211 $6,983.28
Illinois 27 1,595,330 $9,240 $5,792.19
Indiana 21 570,380 $3,487 $6,113.38
Iowa 42 351,620 $1,694 $4,817.93
Kansas 17 281,250 $1,952 $6,941.88
Kentucky 32 407,570 $2,198 $5,392.05
Louisiana 18 374,240 $2,487 $6,645.83
Maine 49 135,170 $492 $3,642.64
Maryland 34 1,143,160 $5,999 $5,247.88
Massachusetts 26 1,048,220 $6,093 $5,812.67
Michigan 33 1,064,400 $5,712 $5,366.87
Minnesota 41 811,520 $3,947 $4,863.68
Mississippi 12 250,380 $1,786 $7,135.01
Missouri 19 595,180 $3,850 $6,468.83
Montana 29 112,060 $629 $5,609.03
Nebraska 25 209,070 $1,243 $5,946.21
Nevada 23 292,780 $1,771 $6,048.50
New Hampshire 43 170,560 $807 $4,731.44
New Jersey 47 1,547,390 $6,694 $4,325.77
New Mexico 36 159,060 $814 $5,120.70
New York 15 2,784,390 $19,583 $7,033.17
North Carolina 22 1,127,090 $6,881 $6,104.96
North Dakota 10 49,420 $365 $7,382.15
Ohio 39 1,146,570 $5,778 $5,039.11
Oklahoma 8 305,930 $2,440 $7,975.20
Oregon 40 556,740 $2,747 $4,934.87
Pennsylvania 38 1,454,530 $7,333 $5,041.54
Rhode Island 50 145,120 $487 $3,354.44
South Carolina 20 523,990 $3,377 $6,443.86
South Dakota 4 58,100 $582 $10,019.97
Tennessee 5 504,460 $4,361 $8,644.19
Texas 11 2,275,810 $16,691 $7,333.88
Utah 3 401,590 $4,082 $10,165.43
Vermont 44 65,610 $302 $4,608.79
Virginia 30 1,212,690 $6,717 $5,538.82
Washington 6 855,110 $7,166 $8,380.77
West Virginia 35 95,190 $499 $5,243.70
Wisconsin 46 715,510 $3,142 $4,390.81
Wyoming 1 41,690 $542 $12,991.08


Source: Tax Policy – Charitable Deductions by State