States Cutting Income Taxes Experience Economic Growth Surge

Tax reforms aimed at cutting or eliminating income taxes have taken root in various states across the United States, leading to notable economic and population growth. As discussions around federal tax cuts intensify, governors and state legislatures are increasingly adopting similar strategies at the local level.

Several states, including Arizona, have enacted significant tax reforms in recent years. In 2021, Arizona’s Republican state senator J.D. Mesnard played a pivotal role in the introduction of a flat tax law, which replaced a progressive tax system that taxed higher earners at greater rates. “We collapsed our five brackets into four, and then into one, which was actually below our lowest rate,” Mesnard stated in an interview with Full Measure. The new flat tax rate of 2.5% has positioned Arizona with the lowest flat tax in the nation. Since implementing this change, the state has reported increased tax revenues and a surge in population.

Interest from lawmakers in other states has grown, with many seeking to replicate Arizona’s model for economic success. Mesnard humorously noted his mixed feelings about this attention, saying, “Part of me was thinking, ‘I don’t want you to compete with us too much,’ but I love to see other states be successful.”

Arizona is not alone in this tax-cutting trend. According to the Tax Foundation, a nonprofit organization that provides research on tax policy, 28 states have reduced income tax rates since 2021. States like Texas, Florida, and Tennessee already do not impose a regular income tax on wages. This year, states such as Alabama, Georgia, North Carolina, and South Carolina have also implemented tax cuts. Meanwhile, Arkansas, Iowa, and Montana are gradually lowering their tax rates, while Mississippi and Oklahoma are planning to eliminate income taxes altogether over time.

Despite the enthusiasm for tax cuts, experts caution against implementing such measures without a comprehensive fiscal strategy. Jared Walczak, vice president of state projects at the Tax Foundation, has raised concerns about Mississippi’s attempt to eliminate its income tax, describing it as a fiscally risky move. “They didn’t have a responsible plan to do this,” he explained, noting that the alternative revenue streams were insufficient. Eventually, Mississippi’s leaders adopted a more cautious plan that includes revenue triggers to evaluate the sustainability of tax reductions.

Critics of states without income taxes argue that these regions often compensate with increased property or sales taxes, which can disproportionately impact low-income residents. However, Walczak contends that taxpayers in states like Tennessee ultimately pay less overall. “You’re not paying the same amount — you are paying less,” he asserted. “Yes, if you’re in Tennessee, your sales taxes are high. But if you add up all your taxes, you’re still paying way less in those states.”

Data from the Tax Foundation supports this assertion, indicating that states that have enacted tax cuts since 2021 have experienced above-average economic performance and population growth.

In contrast, some states are moving in the opposite direction. For example, Illinois has decided to continue taxing tips at the state level, even after they were exempted under federal reforms introduced during the Trump administration.

As the dialogue surrounding tax reform continues across the country, Mesnard believes that Arizona’s experience demonstrates the potential benefits of lowering tax rates. “Arizona has continued to be a place folks talk about moving to,” he said. “This just moved us that much further up the ranks.”

The ongoing developments in state tax policies will likely influence fiscal strategies and economic trends in the coming years, as more states assess the outcomes of their tax reforms.