Each of these states has at least one neighbor where tax rates have dropped recently, and competition is sustaining the trend. “We were the cool kid on the block 15 years ago when we moved to 5% flat,” said Rusty Cannon, president of the Utah Taxpayers Association, referring to his state’s flat income-tax rate this month. But in the past two years Colorado has adopted a 4.4% top rate on income, and Arizona dropped its rate to 2.5%. “We’re no longer the cool kid on the block at all,” said Mr. Cannon.
The tax-cutting trend took off in 2021 as state revenues boomed, driven by postpandemic reopening, rising stock prices and capital gains, and federal aid. By September 2022, 31 states were outperforming their prepandemic revenue trajectories, according to the Pew Charitable Trusts. Twenty-one states have cut their income taxes in this period, according to the Tax Foundation, and they’re betting that returning revenue to taxpayers will spur faster economic growth.