In many Midwest states, new budget years began in July with big changes in tax policy in place
No state in the Midwest has been more aggressive in cutting income tax rates than Kansas.
Prior to legislated changes made in 2012, Kansas had a three-tier graduated income tax structure, with rates ranging from 3.5 percent to 6.45 percent.
By 2018, thanks in part to actions taken this year, Kansas will have a two-tier system with rates of 2.3 percent for the first $30,000 of earnings and 3.9 percent above that income level.
However, the cumulative impact of this year’s tax changes in Kansas is expected to actually increase revenue collections. That is due, in part, to a decision to institute a higher permanent sales tax rate.
In 2010, the sales tax rate in Kansas had been raised temporarily to 6.3 percent, but it was scheduled to drop to 5.7 percent. Legislators this year settled on a rate of 6.15 percent. Ohio raised its sales tax rate as well, from 5.5 percent to 5.75 percent. That increase will partially fill the revenue hole left by two major tax-cutting moves: a gradual 10 percent reduction in rates in all income tax brackets, and a 50 percent tax deduction for business owners on up to $250,000 of income. Ohio lawmakers also established an earned income tax credit for low-wage earners.
In Wisconsin, rate cuts in all four income tax brackets will amount to $648 million in tax relief over the next biennium. North Dakota, meanwhile, is reducing rates in all five tiers of its graduated income tax by about 20 percent.
Minnesota raises tax on highest incomes
Starting next year, a fourth tier will be added to Minnesota’s graduated income tax structure. Earnings of more than $150,000 will be taxed at a rate of 9.85 percent; the state’s highest tier had been 7.85 percent
In praising the tax changes, Gov. Mark Dayton noted that the additional state revenue will allow the state to offer property tax relief (by freezing levy limits and expanding eligibility for homestead tax credits) and to make historic investments in K-12 education.
Iowa reforms property tax system
For years, Iowa lawmakers have tried to fix the system, in part because of the differences in how commercial and industrial property are taxed compared to residential and agricultural land. The latter two types of properties have long been subject to “rollback provisions” — limits on year-to-year growth in assessed values to control property tax increases. Such controls have not been in place for commercial and industrial property.
This has led to concerns that the state’s business climate is unfriendly and that the overall property tax system is too burdensome. Improved fiscal conditions helped lead to a legislative breakthrough this year.
Commercial property taxes will be rolled back 10 percent over the next two years, with the state making up for the difference in dollars lost to local governments due to the change. Commercial and industrial property owners will be eligible for a tax credit as well. The legislative package also included new relief for residential property owners.