The tax returns that millions of Americans will file this spring may bring some rare good news. Most states have again absorbed more money in taxes than expected last year, and many of them are passing on some of that surplus in the form of tax cuts and credits for 2023.
According to the National Association of State Budget Officials, 46 states ended fiscal 2023 with a budget surplus. The black ink continues a trend: This is the third straight year that most states have exceeded revenue projections, partly due to pandemic stimulus payments to states and booming state economies. About 80% of states have approved some sort of income tax break as of 2021, according to the Associated Press.
Some states increased rate cuts in 2023 and 2024, albeit modestly. And a handful of them are using their generosity to provide tax credits, especially to low-income families with children.
Keep in mind that because state taxes are generally lower than federal taxes, changes rarely add – or subtract – as much to your tax profits as changes to the federal tax code. That said, depending on where you live and what you do, these changes could lead you to pay hundreds – maybe even thousands – less to your state in income tax this spring.
States with new or expanded child tax credits
According to Aidan Davis, director of state policy at the Institute on Taxation and Economic Policy (ITEP), a nonprofit, nonpartisan organization, the most impactful changes in state taxes this year have come in the form of new or expanded tax credits for families with children. organization of fiscal policy.
“The first really incredible – and, I would say, positive – trend was that 18 states created or strengthened child tax credits or income tax credits in their states,” Davis says. Three of those states (Minnesota, Oregon and Utah) have launched new child tax credits, she says, while the remainder have modified, and usually improved, existing credits.
According to ITEP’s roundup of changes, states that have changed child tax credits include New York, New Jersey, Colorado, Maine, Maryland and Vermont. Arizona lawmakers created a one-time child tax break.
Not surprisingly, the size of these credits for 2023 varies by state and income. They typically range between $200 and $1,000 per child, depending on income. Minnesota’s new credit offers more: up to $1,750 per child.
Typically, less wealthy families are entitled to the maximum credit, while wealthier families may receive little or none. Only Minnesota families making less than $30,000 get the full amount, for example, and Oregon’s program is aimed only at families in that income range. In other states, the benefit claws back at higher income levels, such as in Vermont for families earning between $125,000 and $165,000, after which the credit phases out completely.
Tax breaks for residents with children dominated state income tax changes in 2023, but there were also changes to tax exemptions given to seniors in at least one state: Michigan. ITEP reports that the Wolverine State’s retirement income subsidies, which were reduced over a decade ago, have been restored under state legislation signed into law in 2023.
States with income tax cuts
In 2021 and 2022, the first years in which most states posted pandemic-era surpluses, a tsunami of cuts were made to state tax rates. They largely remain in place now. But at least five states have made additional reductions in 2023, generally lowering many or all state tax rates by a few tenths of a percentage point.
As a result, state taxpayers in Utah, West Virginia, North Dakota and Arkansas could see a slightly lower state tax bill on their 2023 returns, according to a tally by the Tax Foundation, another nonprofit, nonpartisan tax institute. These cuts – made by Republican-controlled legislatures – are across-the-board reductions that affect all state taxpayers. As a result, Davis says, the changes will provide greater real-terms benefits to residents in the highest tax brackets.
Looking ahead, several states have already passed 2024 cuts that took effect Jan. 1 — or will on July 1 — and will affect tax liabilities when taxpayers file their returns next year.
Michigan is an exception to this rule. In a recent court decision, the Michigan Court of Appeals found that the state’s 2023 tax cuts were only temporary and allowed Democratic Gov. Gretchen Whitmer to reverse the change, which she said was overly geared toward relief for the wealthiest Michiganders.
Otherwise, most of the state tax changes taking effect this year represent further across-the-board reductions in red states. According to the Tax Institute, these include Arkansas, Indiana, Iowa, Kentucky, Mississippi, Missouri, Nebraska, North Carolina and South Carolina. Two states – Ohio and Montana – will consolidate some tax brackets and one state, Georgia, will move to a flat tax.
Groups like ITEC worry that continued income tax cuts in 2024 and beyond, while welcomed by some taxpayers, will increasingly begin to trigger consequences that many may not want. State surpluses are expected to be lower, or even reversed, this year, according to projections from the National Association of State Budget Officers.
Davis fears that the negative outcomes of this crisis could include continued cuts to public services, such as education, or the imposition of higher taxes on consumption and property: regressive taxes that “will widen the gap between wealthy residents and those poor.” she adds.
More from Money
When are state taxes due? Here are the deadlines for 2024
Top 10 Best Tax Software Programs of 2024
The best ways to invest your tax refund in 2024