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Day 24 - Senate individual income tax proposal

Sen. Wayne Niederhauser presented SB223 in Senate Revenue and Taxation this morning. The governor's office anticipates that 80% of taxpayers will switch to the new tax system as proposed in SB223. If passed, SB223 would reduce individual income taxes by $102 million. Even with this tax cut, government expenditures for transportation and education and almost everything else will continue to grow significantly.

Proposed changes
- A flat tax rate of 5%, down from the current 5.35%

- Phased-out credits

. . . - 6% of either federal standard deduction or itemized deductions (excl state income tax paid)

. . . - 6% of 75% of federal personal exemptions

. . . - credits are phased-out at 1.5 cents per dollar of AGI starting at $28,000 for a married couple

- No changes to the current bracketed system

The rate reduction from 5.35% to 5.0% will induce 6% of taxpayers to switch to the new system while the credits will induce 74% to switch to the new system.

Why is this a good idea?
Tax competition has been driving state individual income tax rates down. According our analysis using data from the CCH State Tax Handbook and the Federation of Tax Administrators, top marginal state individual income tax rates have decreased 25% in the past two decades:

1985 . . . . .7.12%
2006 . . . . 5.32%

Click [here] to read more about this.

Also, a tax cut is in order since state government revenues have been growing rapidly. Click [here] to see our report on state government growth.

Disclaimer: Like all legislation, SB223 may eventually be modified, meaning that the above points may no longer be 100% relevant.