As states are closing their books for FY 2021, a theme is emerging which starkly contrasts what we all witnessed one year ago. Tax relief as a viable option for many states is owed to the economic bounce-back experienced across the nation thanks to the vast availability of the COVID-19 vaccine and relaxed regulations by state and local governments.
State Versus State Tax Rate Competition
It seems that, in light of the economic optimism, states are competing with each other in order to be more appealing to both taxpayers and corporations. Already this year, 11 U.S. states have enacted laws that will lower their current income tax rates. Individual income tax rates will be reduced in 10 of these and corporate income tax rates will lessen in 5 with effective dates ranging from the beginning of 2021, retroactively, to 2023 and beyond.
What States are Involved?
Many of these 11 states are also restructuring tax brackets with the goal of a more neutral structure. Arizona, Idaho, Iowa, Montana, and Ohio have all reduced their number of brackets for individual income. Arizona, Idaho, Louisiana, Ohio, and Oklahoma have each reduced their marginal income tax rates. All but Wisconsin have reduced the top marginal tax rate. Montana completely restructured taking 7 brackets down to 2 and implementing a significantly higher deduction to target relief at the bottom of the income spectrum.
North Carolina passed a budget in the Senate that would lower their 5.25% rate to 3.99% and eliminate all corporate income tax by 2026. This would put them in the running with North Dakota, Pennsylvania, and Indiana for the lowest top tax rate.
These 11 states are responding to the fiscal surprise that is 2021 with tax structures that incentivize both individual taxpayers and business owners to take a closer look at where their roots lie. Another incentive that investors and small business owners alike should consider is each state’s conformity to QSBS, a federal tax exemption that can allow up to 100% capital gains tax exclusion on the sale of qualified small business stock.
QSBS Expert provides resources to orient you to the benefits and limitations surrounding qualified small business stock. Visit our webpage to explore this investment opportunity.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.