THE STATE GOVERNMENT RESPONSE TO FEDERAL INCOME TAX REFORM: INDICATIONS FROM THE STATES THAT COMPLETED THEIR WORK EARLY

Among the 22 states in the US that are finished with tax legislation for the year, 2 do not impose income taxes (South Dakota and Wyoming). Two others (Nebraska and North Dakota) did not have "a windfall" because they piggybacked on federal tax liability. Of the remaining states, 9 effectively kept their entire windfall. What is occurring is a pattern of convergence, with states having highly progressive taxes reducing their maximum tax rates and states having little or no progression not changing their tax rates and therefore becoming considerably more progressive. Changes in progressivity have significant implications for the future growth of state tax revenue because of the close relationship between an income tax's progressivity and its elasticity. Another surprising result of the analysis of the 22 states is that most states are not returning the entire "windfall" to the taxpayers. Not all of the tax reform action centers around the income tax; many states are acting on themes similar to those embedded in federal reform.