These States Are Using Their Budget Surpluses to Give Tax Breaks to Residents
The tax returns millions of Americans are filing this spring may bring a rare bit of good news. Most states again took in more money in taxes than they forecast last year, and many of them are passing along a chunk of those surpluses in the form of tax cuts and credits for 2023.
According to the National Association of State Budget Officers, 46 states ended the 2023 fiscal year with a budget surplus. The black ink continues a trend: This is the third consecutive year in which most states exceeded revenue projections, due in part to pandemic stimulus payments to states and booming state economies. About 80% of states have passed some sort of income tax break since 2021, according to the Associated Press.
Some states deepened those rate cuts in 2023 and 2024, if modestly. And a handful of them are using their bounty to deliver tax credits, mostly to lower-income families with children.
Keep in mind that since state taxes are generally lower than federal ones, changes rarely add — or subtract — as much to your tax bottom line as do changes to the federal tax code. That said, depending on where you live and what you make, these changes could lead you to pay hundreds — perhaps even thousands — less to your state in income tax this spring.
States with new or expanded child tax credits
The most impactful changes in state taxes this year have come in the form of new or expanded tax credits targeted at families with children, according to Aidan Davis, state policy director at the Institute of Taxation and Economic Policy (ITEP), a nonprofit, nonpartisan tax policy organization.
“The first really incredible — and, I would say, positive — trend was that 18 states created or enhanced child tax credits or income tax credits in their states,” Davis says. Three of those states (Minnesota, Oregon and Utah) launched brand-new child tax credits, she says, with the remainder altering, and usually improving, existing credits.
According to ITEP’s rundown of the changes, states that tweaked child tax credits include New York, New Jersey, Colorado, Maine, Maryland and Vermont. Arizona lawmakers created a one-time child tax rebate.
Unsurprisingly, the size of these 2023 credits vary by state and income. They typically range between $200 to $1,000 per child, depending on income. Minnesota’s new credit offers the most — up to $1,750 per child.
As a rule, the least-wealthy families qualify for the maximum credit, and the wealthiest may receive little or none of it. Only Minnesota households that make less than $30,000 or so get the full amount, for example, and Oregon’s program is targeted only at families in that income range. In other states, the benefit is clawed back at higher income levels — as it is for families who make between $125,000 and $165,000 in Vermont, after which the credit phases out entirely.
Tax breaks for residents with children dominated the state income tax changes in 2023, but there were also changes to the tax exemptions given to older adults in at least one state: Michigan. ITEP reports that the Wolverine State’s retirement income subsidies, which were pared back over a decade ago, were reinstated under state legislation signed in 2023.
States with income tax cuts
In 2021 and 2022, the first years in which the majority of states ran pandemic-era surpluses, a tsunami of cuts were made to state tax rates. They largely remain in place now. But at least five states made further reductions in 2023, generally by lowering many or all state tax rates by a few tenths of a percent.
As a result, state taxpayers in Utah, West Virginia, North Dakota and Arkansas may see a slightly smaller state tax bill on their 2023 returns, according to a tally by the Tax Foundation, another nonprofit, nonpartisan tax institute. Those cuts — made by Republican-controlled legislatures — are across-the-board reductions that affect all state taxpayers. Consequently, Davis says, the changes will deliver higher benefits in real terms to residents in the highest tax brackets.
Looking ahead, a number of states have already passed 2024 cuts that kicked in on Jan. 1 — or will on July 1 — and will affect tax liabilities when taxpayers file their returns next year.
Michigan is one exception to that rule. In a recent court decision, the Michigan Court of Appeals deemed the state’s 2023 tax cuts to be only temporary and allowed Democratic Governor Gretchen Whitmer to roll back the change, which she had deemed to be overly tilted towards relief for the wealthiest Michiganders.
Otherwise, most of the state tax changes taking effect this year are 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.
There’s concern from groups like ITEC that continued income-tax cuts in 2024 and beyond, though welcomed by some taxpayers, will increasingly begin to trigger consequences that many may not want. State surpluses are expected to be lower, or even reverse, this year, according to projections from the National Association of State Budget Officers.
Davis says she fears the negative outcomes of that crunch could include continued cuts to public services, such as education, or the imposition of higher taxes on consumption and properties: regressive taxes that “will widen the gap between rich and poor state residents,” she adds.
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