14 States With Income Tax Cuts in 2023

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1. Alabama

Under H.B. 162, enacted in April and beginning in 2023, Alabama will exempt the first $6,000 of otherwise taxable retirement income for those 65 or older.

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2. Arizona

Arizona joined the growing list of states with a flat individual income tax structure. S.B. 1828, enacted in June 2021, established tax triggers that made the speed of the 2.5% flat tax phase-in contingent on the speed at which the state reached specified revenue targets. Since Arizona reached the final revenue target one year sooner than anticipated, the rate schedule on Jan. 1 converted directly from a two-bracket structure with rates of 2.55% and 2.98% to a flat rate of 2.5%.

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3. Delaware

In compliance with Senate Substitute 1 for S.B. 188, enacted in July, Delaware increased its military pension exclusion from $2,000 to $12,500 for military retirees under the age of 60, effective Jan. 1.

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4. Idaho

Idaho moved to a flat individual income tax structure at a rate of 5.8%, down from the current top marginal rate of 6% under H.B. 1, enacted in September. The conversion took effect Jan. 3, applied retroactively to Jan. 1.

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5. Indiana

Under H.B. 1002, enacted in March, Indiana’s flat individual income tax rate will be reduced from 3.23% to 3.15% effective for 2023 and 2024, with triggers in place that could reduce the rate to 2.9% by 2029 if specified conditions are met. In addition, under S.B. 382, also enacted in March, Indiana is phasing out its add-back of the federal income tax deduction allowed for wagering taxes, with the add-back decreasing from 50% to 37.5% of the federal amount.

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6. Iowa

Iowa enacted comprehensive tax reforms in 2018, 2021 and 2022, and many of these reforms will continue phasing in with the new year. Effective Jan. 1, Iowa’s nine individual income tax rates will be consolidated into four, and the top rate will fall from 8.53% to 6%. The state’s graduated-rate tax structure is scheduled to shift to a flat tax at a rate of 3.9% in 2026.

In addition, the individual alternative minimum tax rate has been set at 6% for 2023, and will phase down over time. Iowa also began exempting retirement income on Jan. 1, and will phase out its inheritance tax by 2025, with a further reduction in rates in effect as of Jan. 1.

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7. Kentucky

H.B. 8, enacted in April, reduced individual income tax rates for Kentuckians while broadening the sales tax base. Many of the law’s provisions took effect Jan. 1, including initial reduction in the individual income tax rate from 5% to 4.5%. The law also established tax triggers that, contingent upon revenue meeting certain benchmarks, could phase down the individual income tax rate to zero over many years, starting with a likely further reduction from 4.5% to 4% in 2024.

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8. Mississippi

Mississippi has moved to a flat individual income tax structure as a result of H.B. 531, enacted in April. Effective Jan. 1, the current 4% tax on taxable income between $5,000 and $10,000 will be eliminated, leaving a single rate of 5% on income exceeding $10,000. The flat rate will then phase down to 4.7% in 2024, 4.4% in 2025 and 4% in 2026.

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9. Missouri

In October, Missouri legislators passed S.B. 3, designed to expedite planned individual income tax rate reductions and replace existing tax triggers with ones that reduce the top marginal rate further and faster than planned in previous legislation enacted in 2014 and 2021. Effective Jan. 1, Missouri’s top marginal individual income tax rate was reduced from 5.3% to 4.95%, and the amount of income that is exempt from the state’s individual income tax rates increased from $100 to $1,000. Existing triggers seek to eventually reduce the top rate to 4.5%.

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10. Nebraska

Effective Jan. 1, Nebraska will reduce both its top marginal individual income tax rate and its top marginal corporate income tax rate to 5.84% by 2027 under L.B. 873, enacted in April. The individual income tax will be reduced by 0.2 percentage points per year, with an initial reduction from 6.84% to 6.64% in 2023. The 2022 reforms also expedite a pre-existing phase-in of an income tax exemption for Social Security benefits, this year allowing taxpayers to deduct 60% of Social Security benefits included in federal adjusted gross income, up from 40% in 2022.

Separately, following the February enactment of L.B. 310, Nebraska will reduce the inheritance tax for all classes of beneficiaries by reducing rates and increasing exemptions. The lower rates and higher exemptions will apply for beneficiaries of decedents who died on or after Jan. 1, 2023.

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11. New Hampshire

New Hampshire will begin phasing out its income tax on interest and dividends income in 2023, bringing the rate down from 5% to 4%, the result of H.B. 2, enacted in June. The rate is scheduled to phase down by one percentage point per year until the tax is phased out entirely in 2027.

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12. New York

New York’s budget for fiscal year 2023, enacted in April, accelerates income tax rate reductions originally passed in 2016 for middle-income earners. Under S. 8009, rate reductions originally scheduled for 2025 will take effect two years earlier than planned, bringing the rate on income between $13,900 and $80,650 (single filers) and between $27,900 and $161,550 (joint filers) to 5.5% from 5.85% for tax year 2022, and bringing the rate on income between $80,650 and $215,400 (single filers) and between $161,500 and $323,200 (joint filers) to 6% from 6.25% for tax year 2022.

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13. North Carolina

North Carolina’s flat individual income tax rate will decrease from 4.99% to 4.75% for 2023 as a result of S.B. 105, the 2021 Appropriations Act, enacted in November 2021. Future scheduled reductions enacted under this same law will ultimately bring the rate to 3.99% in 2027.

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14. Rhode Island

Beginning Jan. 1, taxpayers will be allowed to subtract any military service pension benefits included in federal adjusted gross income when calculating their income for Rhode Island income tax purposes, the result of H. 7123, enacted in June. Separately, taxpayers may soon exclude up to $20,000 of their federally taxable retirement income — including from pensions, annuities and 401(k) plans — from the calculation of state taxable income, up from $15,000 in 2022.

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14 States With Income Tax Cuts in 2023

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1. Alabama

2. Arizona

3. Delaware

4. Idaho

5. Indiana

6. Iowa

7. Kentucky

8. Mississippi

9. Missouri

10. Nebraska

11. New Hampshire

12. New York

13. North Carolina

14. Rhode Island

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14 States With Income Tax Cuts in 2023

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More on this topic

1. Alabama

2. Arizona

3. Delaware

4. Idaho

5. Indiana

6. Iowa

7. Kentucky

8. Mississippi

9. Missouri

10. Nebraska

11. New Hampshire

12. New York

13. North Carolina

14. Rhode Island

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