8 States That Cut Income Taxes in 2013

At the beginning of 2013, several big federal tax increases hit American taxpayers, including payroll tax climbing back to normal levels and the return of the 39.6% tax bracket, along with surcharges for high-income taxpayers. But several states decided to make tax cuts in 2013, giving their residents a reprieve from higher taxation. Let's find out which ones made the biggest cuts over the past year.


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Arkansas
Arkansas' new laws gave residents approximately $160 million in tax relief. Under the new provisions, the lowest bracket will go from 1% to 0.9% at the beginning of 2014, while all other brackets will see drops of a tenth of a percentage point that will take effect for the 2015 tax year. Arkansans will also benefit from a reduction in state sales taxes on groceries, but the state still suffers from the fact that neighboring Tennessee and Texas have no state income tax on wages and salaries at all. Some business advocates have argued that eliminating the income tax entirely would make Arkansas more competitive.


Indiana
Indiana passed a comprehensive tax package addressing inheritance taxes as well as personal and corporate income tax. For personal tax rates, a gradual reduction will happen from current 3.4% levels to 3.3% in 2015 and 3.23% in 2017. The state's governor had initially asked for reductions that were twice as large, but legislators agreed to the small reduction in conjunction with the repeal of inheritance taxes for those dying in 2013 or after, accelerating an phase-out of the tax that had been passed earlier.

Iowa
Iowa's $4.4 billion tax-cut package included both property tax and personal income tax relief. Property tax increases on homes and farm property will be capped at 3% annually, and a doubling of the earned-income tax credit from 7% to 14% in 2013 and then 15% in 2014 will help low-income taxpayers. Also, additional tax credits will be available to certain state income tax filers starting in 2014, providing about $90 million in annual income tax reductions in total.

Kansas
Kansas gave residents about $3.8 billion in tax relief through a combination of sales tax and income tax reductions. Income tax rates for top-bracket taxpayers will fall from 4.9% to 3.9% by 2018, while the lowest bracket will drop from 3% to 2.3% by 2017. The plan does come with some costs, though, slashing itemized deductions in half by 30% this year and in half by 2018, and also cutting standard deductions for joint filers and head-of-household taxpayers. Still, the law comes with provisions for more cuts if state tax revenue growth rises above 2% beginning in 2019.

North Carolina
North Carolina passed measures reducing several different taxes by about $500 million. For its income tax, the state established a flat-tax system, eliminating the current 6%, 7%, and 7.75% rates and putting in their place a single rate of 5.8% for 2014 and 5.75% for 2015. North Carolina boosted its standard deductions by 150%, from $6,000 to $15,000 for joint filers and from $3,000 to $7,500 for single filers.

Ohio
Ohio's tax measures reduced small business and personal income taxes, providing about $2.7 billion in savings to residents. For income taxes, a phased-in 10% cut in all tax rates will take place between now and 2015, with 8.5% reductions in rates for 2013 and 9% drops for 2014. In addition, a new earned-income tax credit will provide help to nearly half a million low-income households in Ohio. The state did suspend inflation indexing of tax brackets and exemption amounts from 2013 to 2015, which will offset some of the tax breaks, and personal exemptions of $20 from tax will only be available to lower-income households earning less than $30,000.

Oklahoma
Earlier this year, Oklahoma passed personal income tax relief that would have saved residents about $237 million. The measure would have reduced the top income tax rate in the state from 5.25% to 5% beginning in 2015, and also would have created future reductions if revenue growth exceeded certain guidelines. But just days ago, the Oklahoma Supreme Court ruled the measure unconstitutional because the law that enacted the cuts also tried to create a fund for building repairs to the state's Capitol, and judges ruled that those two provisions should have been put in separate laws. It's unclear whether the state will try to re-establish the tax break as a separate measure now.

Wisconsin
Wisconsin spent $650 million reducing personal income taxes within the state. The cuts compressed five previous brackets into four and made cuts at all levels, with the bottom 4.6% rate going to 4.4%, 6.15% falling to 5.84%, 6.50% and 6.75% rates dropping to 6.27%, and the top 7.75% rate declining to 7.65%. More recently, the state's governor has called for all-out repeal of the state income tax, potentially at the expense of raising sales taxes or eliminating tax exemptions.

More to come?
Oklahoma residents will have to wait to see if the legislature restores their tax cuts in the near future. But it's entirely possible that more states will jump on the bandwagon and reduce state income taxes in 2014. For now, though, residents in the seven states whose cuts haven't been overturned will enjoy getting a break on their tax burdens, even if many of them won't take effect until future tax years.

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The article 8 States That Cut Income Taxes in 2013 originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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