Denver, Colorado and the Rocky Mountains at dawn
The new budget recently approved by the Republican-led North Carolina General Assembly and Governor Roy Cooper (D) makes it 13 states where personal income taxes have been cut in 2021. That number could rise to 14 before the close of the year thanks to a special session of the Arkansas legislature that will take place in December for the purpose of enacting income tax relief.
Yet, as active as 2021 has been when it comes to state legislation that cuts state income taxes, 2022 is already shaping up to be just as eventful and possibly even busier. Residents of three states, in fact, are already slated to receive income tax relief in 2022 thanks to state laws that automatically trigger it.
Two of these three states, Oregon and Colorado, are controlled by Democrats. The other, Indiana, is governed by Republicans. These three states have achieved budget surpluses and reserves so large that automatic tax relief is triggered under existing state law in 2022, sans any action taken by the legislature.
The Oregon constitution contains a taxpayer safeguard referred to as “the kicker.” Under the kicker, the state government must refund Oregon taxpayers when tax collections exceed 2% of revenue projections. Thanks to the kicker, Oregonians are expected to receive $1.9 billion in refunds in the coming year, a new record. Economists are projecting another kicker in 2024, one for $558 million.
Colorado, like Oregon, is another Democratic-controlled state where taxpayers are scheduled to receive a temporary income tax cut in 2022 automatically triggered by a tax and spending limit included in the state constitution. Colorado’s Taxpayers Bill of Rights (TABOR), a constitutional amendment approved in 1992, installed what remains the nation’s only state spending limit tied to the combined rate of population growth plus inflation. Revenue collected in excess of that spending limit must be refunded to taxpayers.
TABOR permitted revenue growth of up to 3.1% in FY 2020-21. During that period, however, Colorado tax collectors saw an 8% annual increase in revenue subject to TABOR. As a result, Colorado residents will also soon receive an average sales tax refund of $69 for individual filers, $166 for joint filers. This sales tax relief comes months after a permanent state income tax rate cut was approved by Colorado voters.
Passed by a 56–43% margin in November 2020, Proposition 116 permanently cut the state’s flat income tax from 4.63% to 4.55%. TABOR has triggered a temporary lowering of the rate even further, to 4.50% for 2022.
More permanent income tax relief could be on the way. Meanwhile, following the success of Prop. 116 in 2020, another income tax cutting ballot measure has turned in enough valid signatures to appear on the 2022 ballot. If voters approve this new measure, it would permanently lower Colorado’s income tax rate from 4.55% to 4.40%.
The third state where taxpayers will receive automatically triggered refunds in 2022, Indiana, realized a 14% increase in revenue collections over the past year. Indiana law requires that taxpayers be refunded when state reserves exceed 12.5% of the general fund. Those reserves exceeded 23% of the general fund this year.
As a result, the state of Indiana will refund $545 million back to taxpayers, which will be divided into estimated payments of $170 per taxpayer. This refund to be issued in 2022 is 62% higher than what was sent out the last time an automatic refund was triggered in 2012. Even after the refund, Indiana will still have a $3.4 billion surplus, which Representative Greg Porter referred an “embarrassment of riches.” Indiana lawmakers are already considering a reduction in the 7.0% sales tax in 2022.
Between the three states where automatically triggered tax cuts are scheduled to take effect in 2022, along with the other state capitals where lawmakers are preparing to file legislation to phase out our significantly cut state income tax rates, 2022 is already shaping up to be just as active as 2021 when it comes to efforts to reduce or eliminate state income taxes.
