In many Midwest states, new budget years began in July with big changes in tax policy in place

Stateline Midwest ~ July/August 2013

The start of new fiscal years across the Midwest is also marking a new era in tax policy for many states as the result of actions taken during the 2013 legislative sessions.

As reported in a Stateline Midwest cover story earlier this year, a return to growing state revenue collections allowed legislators this year to focus more on tax policy — most commonly tax cuts.
In at least five states, legislatures chose to reduce income tax rates. In a sixth state, Iowa, lawmakers reached agreement on a long-sought reform of the property tax system. Here is a review of some of the major tax policy changes made in 2013.
Income tax cuts, sales tax hikes
At the height of the state fiscal crisis brought on by the national recession, most legislatures and governors in this region chose not to fill budget shortfalls with increases in the income tax. And now that fiscal conditions have improved, many state leaders seized the opportunity to slash rates.
In Indiana, Gov. Indiana Mike Pence made a reduction in the state’s flat income tax a centerpiece of his first-year legislative agenda.
Pence wanted the rate cut by 10 percent; instead, the legislature agreed to a gradual decrease of 5 percent, which will result in Indiana’s income tax rate dropping from 3.4 percent to 3.23 percent over the next four years. Lawmakers also ended the state’s inheritance tax. 

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.

Wisconsin and North Dakota are the other two Midwestern states where income tax rates will fall in the year ahead.

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

Amid all of these tax cuts this year in the Midwest, the Minnesota Legislature stands out for what it did — increase income taxes.

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

Lawmakers also voted to raise the state’s cigarette tax, from $1.23 to $2.83 a pack. 

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 

As a result of actions taken this year in Iowa, residents will be in line for income tax credits, and the state’s low-wage earners will receive a larger earned income tax credit. But a reform of the state’s property tax system was hailed as perhaps the single greatest accomplishment of the legislative session.

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.