12.22.22 – Tax Foundation –
Most state tax changes take effect at the beginning of the calendar year (January 1) or at the beginning of the fiscal year (July 1 for most states).
On January 1, 2023, thirty-eight states have noteworthy tax changes taking effect. Most of these changes represent net tax reductions, the result of an unprecedented wave of rate reductions and other tax cuts in the past two years as states respond to burgeoning revenues, greater tax competition in an era of enhanced mobility, and the impact of high inflation on residents.
Individual Income Tax Changes
Eleven states have individual income tax rate reductions taking effect on January 1: Arizona, Idaho, Indiana, Iowa, Kentucky, Mississippi, Missouri, Nebraska, New Hampshire (interest and dividends income only), New York, and North Carolina. Three of these states—Arizona, Idaho, and Mississippi—are converting from graduated-rate income tax structures to flat tax structures on New Year’s Day.
One state, Massachusetts, has an income tax rate increase taking effect. Massachusetts’s individual income tax will convert from a flat to a graduated-rate tax with a new rate of 9 percent on income exceeding $1 million.
Five states—Alabama, Delaware, Iowa, Rhode Island, and Nebraska—are newly exempting all or a portion of retirement income or military pension income from income taxation.
Two states, Hawaii and Illinois, will expand their earned income tax credits (EITCs).
Corporate Income Tax and Other Business Tax Changes
Four states—Arkansas, Nebraska, New Hampshire, and Pennsylvania—have corporate income tax rate reductions taking effect.
One state, Vermont, will repeal its throwback rule.
Two states, Louisiana and North Carolina, will make their capital stock taxes less burdensome.
Sales and Use Tax Changes
Virginia will newly exempt groceries from its state sales tax base, while Kansas will begin phasing in a state sales tax exemption for groceries by applying a preferential rate. Several states will implement other notable new sales tax exemptions, with Colorado and Iowa newly exempting diapers and menstrual products and Virginia exempting certain essential hygiene products, including menstrual products.
One state, Kentucky, will newly apply its sales tax to select services to help pay for individual income tax rate reductions.
One state, Missouri, has a sales tax economic nexus statute taking effect.
Excise Tax Changes
Seven states—Connecticut, Florida, Illinois, Michigan, New York, North Carolina, and Utah—will see gas taxes increase on January 1, either due to inflation indexing, automatic adjustments tied to the average price of fuel, or the expiration of gas tax holidays.
One state, New Jersey, will increase its excise tax on recreational marijuana.
These and other tax changes taking effect on January 1 are detailed below. In addition to the notable tax changes mentioned below, many states have routine or less notable tax changes taking effect that are not mentioned here. These include, but are not limited to, annual adjustments to income tax brackets, standard deductions, and personal exemptions; automatic formula-based changes to unemployment insurance taxes; changes in interest rates on taxes owed; administrative changes; and changes to tax credits and other narrow-based taxes or tax provisions.
State-by-State Overview of Notable State Tax Changes Taking Effect January 1, 2023
Alabama Tax Changes Effective January 1, 2023
Under current law, Alabama’s business privilege tax has a minimum payment of $100 per year, but that minimum will phase out as a result of H.B. 391, enacted in April 2022. Starting in 2023, the minimum tax owed will decrease from $100 to $50. Beginning in 2024, businesses with a liability of $100 or less will no longer be required to remit a business privilege tax payment.
Separately, under H.B. 162, enacted in April 2022 and beginning in 2023, Alabama will exempt the first $6,000 of otherwise taxable retirement income for those 65 or older. Click here to return to top.
Alaska Tax Changes Effective January 1, 2023
Beginning in 2023, long-scheduled changes to Alaska’s production tax, or its severance tax on oil and natural gas extraction, will take effect, increasing tax liability for some companies. Specifically, fields that began production before 2017 will no longer be able to claim a 20 or 30 percent gross value reduction starting in January 2023 or after three years of the Alaska North Slope (ANS) price exceeding $70.
Arizona Tax Changes Effective January 1, 2023
On January 1, Arizona will join the growing list of states with a flat individual income tax structure, one year earlier than originally anticipated. Under S.B. 1828, enacted in June 2021, Arizona has been in the process of consolidating its individual income tax brackets. The law established tax triggers that made the speed of the 2.5 percent flat tax phase-in contingent upon the speed at which the state reached specified revenue targets. Since Arizona reached the final revenue target sooner than anticipated, the rate schedule will convert directly from a two-bracket structure with rates of 2.55 and 2.98 percent to a flat rate of 2.5 percent, without the need for another year of a two-rate structure.
Furthermore, S.B. 1738, enacted in June 2022, aligns the income tax rate for pass-throughs electing to be taxed at the entity level with the individual income tax rate, thus bringing the entity-level rate to 2.5 percent two years earlier than expected.
Arkansas Tax Changes Effective January 1, 2023
In August 2022, Arkansas legislators passed H.B. 1002, a bill to accelerate previously planned individual and corporate income tax rate reductions. The reduction in the top marginal individual income tax rate from 5.5 to 4.9 percent was retroactive to 2022, but the reduction in the top marginal corporate income tax rate from 5.9 to 5.3 percent takes effect on January 1, 2023.
California Tax Changes Effective January 1, 2023
Beginning January 1, cannabis retailers, rather than distributors, will be responsible for collecting and remitting related excise taxes.
Additionally, California’s new lithium extraction tax takes effect on January 1, with payments based on the weight of lithium extracted by the taxpayer.
Colorado Tax Changes Effective January 1, 2023
Starting January 1, 2023, sales of diapers and menstrual products will be exempt from the state sales tax as a result of H.B. 22-1055, enacted in June 2022.
Connecticut Tax Changes Effective January 1, 2023
Beginning January 1, Connecticut will utilize a vehicle miles traveled (VMT) tax for large commercial trucks as a result of H.B. 6688, enacted in June 2022. Specifically, taxpayers will pay between 2.5 and 17.5 cents (based on weight) per mile for every mile traveled in the state.
Additionally, Connecticut’s gas tax holiday expires at the start of the new year. The state plans to phase in the 25-cent gas tax at five cents per month for five months.
Delaware Tax Changes Effective January 1, 2023
Due to the enactment in July 2022 of Senate Substitute 1 for S.B. 188, Delaware will increase its military pension exclusion from $2,000 to $12,500 for military retirees under the age of 60 as of January 1.
Florida Tax Changes Effective January 1, 2023
Florida’s excise tax on gas and diesel fuel will increase by 1.2 cents per gallon as part of an automatic inflation adjustment written into state law, bringing the tax from 19 to 20.2 cpg for both gasoline and diesel. The State Comprehensive Enhanced Transportation System (SCETS) tax rate on gasoline and diesel will also increase, rising from 8.3 to 8.6 cpg for gasoline and from 15.3 to 15.9 cpg for diesel.
Georgia Tax Changes Effective January 1, 2023
As a result of H.B. 593, enacted in March 2021, Georgia’s standard deduction will increase from $4,600 to $5,400 for single filers and from $6,000 to $7,100 for joint filers.
Hawaii Tax Changes Effective January 1, 2023
Hawaii’s earned income tax credit (EITC) will become refundable beginning in 2023 as a result of H.B. 2510, enacted in June 2022.
Idaho Tax Changes Effective January 1, 2023
Under H.B. 1, enacted in September 2022, Idaho will move to a flat individual income tax structure at a rate of 5.8 percent, down from the current top marginal rate of 6 percent. As this law was designed in part to supersede a tax increase proposal that was approved for the ballot but later withdrawn, the law technically takes effect January 3, 2023, but its provisions apply retroactively to January 1, 2023, and we have elected to include it in this update.
Illinois Tax Changes Effective January 1, 2023
Inflation adjustments to Illinois’s gas tax will resume in January, following a six-month delay of the inflation adjustment that would have increased the gas tax by 2.2 cents per gallon in July 2022. Starting January 1, a gas tax increase of 3.1 cpg will take effect, bringing the total state gas tax to 42.3 cpg. Illinois’s annual inflation adjustments are the result of a 2019 state law that also doubled the gas tax from 19 to 39 cpg. Since the July 2022 inflation adjustment was delayed until January 2023, Illinois is scheduled to see two inflation adjustments in 2023, with one occurring in January and another in July to compensate for inflation in fiscal year 2023.
On January 1, Illinois’s EITC will also increase from 18 to 20 percent of the federal credit amount, as a result of a budget provision included in S.B. 157, enacted in April 2022.
Indiana Tax Changes Effective January 1, 2023
Under H.B. 1002, enacted in March 2022, Indiana’s flat individual income tax rate will be reduced from 3.23 to 3.15 percent effective for 2023 and 2024, with triggers in place that could reduce the rate to 2.9 percent by 2029 if specified conditions are met.
Additionally, under H.B. 1260, enacted in March 2022, Indiana’s $3,000 mortgage deduction will be repealed, while the property tax homestead deduction will increase by $3,000, allowing taxpayers to deduct the lesser of 60 percent of the assessed value of the property or $48,000 (up from $45,000) in 2022. Additionally, senior citizens may claim a tax deduction on homes valued up to $240,000 (up from $200,000) in 2022.
Under S.B. 382, enacted in March 2022, 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 percent of the federal amount.
Iowa Tax Changes Effective January 1, 2023
Iowa enacted comprehensive tax reforms in 2018, 2021, and 2022, and many of these reforms will continue phasing in with the new year. Most notably, effective January 1, Iowa’s nine individual income tax rates will be consolidated into four, and the top rate will decrease from 8.53 to 6 percent. (Iowa’s graduated-rate tax structure is scheduled to shift to a flat tax at a rate of 3.9 percent in 2026.) The individual alternative minimum tax rate will be set at 6 percent for 2023 and will phase down over time. In addition, starting in 2023, the standard deduction and state deduction for federal taxes paid will be repealed, broadening the base to help pay for reductions to the rate. Iowa will also exempt retirement income and certain farm rental income from taxation beginning January 1, and phase out its inheritance tax by 2025, with a further reduction in rates taking effect on January 1.
Separately, under S.F. 2367, enacted in June 2022, Iowa will exempt diapers and menstrual products from its sales tax beginning January 1.
Kansas Tax Changes Effective January 1, 2023
Kansas will begin applying a preferential sales tax rate to groceries, following the enactment of H.B. 2106 in May 2022. Specifically, the state sales tax on groceries is scheduled to phase down to 4 percent in 2023 and 2 percent in 2024 before phasing down to zero in 2025. The general sales tax rate remains 6.5 percent.
Kentucky Tax Changes Effective January 1, 2023
In April 2022, H.B. 8 was enacted, reducing individual income tax rates while broadening the sales tax base. Many of the law’s provisions take effect on January 1, 2023, including the initial reduction in the individual income tax rate from 5 to 4.5 percent and the application of the sales tax to additional services, including many personal consumption services and some business inputs. For some services, including limousine, car rental, ridesharing, carsharing, and taxicab services, a 6 percent excise tax will be applied in lieu of the general sales tax.
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 4.0 percent in 2024.
Starting January 1, 2023, a new excise tax of 3 cents per kilowatt hour will be applied to electric vehicle power distributed in Kentucky by an electric vehicle power dealer or by electric charging stations located on state property. Further, electric and hybrid vehicles will be subject to a new registration and renewal fee of $120 for electric vehicle owners and $60 for electric motorcycle and hybrid vehicle owners. Finally, the 1 percent state transient room tax will newly apply to campgrounds and RV parks.
Louisiana Tax Changes Effective January 1, 2023
Maine Tax Changes Effective January 1, 2023
Beginning January 1, 2023, the sales tax exemption for residential electricity will be expanded for eligible customers enrolled in either a low-income assistance program administered by the Maine State Housing Authority or in an arrearage management program administered by electric transmission and distribution utilities. The current exemption was limited to the first 750 kilowatt hours of residential electricity per month.
Maryland Tax Changes Effective January 1, 2023
Maryland temporarily increased the refundable version of its EITC from 28 percent in 2019 to 45 percent for tax years 2020 through 2022 with the enactment of S.B. 496 in February 2021. The credit is set to revert to 28 percent for tax years 2023 and beyond.
Massachusetts Tax Changes Effective January 1, 2023
The November 2022 passage of Massachusetts Question 1, a legislatively referred constitutional amendment, will modify the state’s constitution to add a 4 percent surtax to the current 5 percent individual income tax rate for annual income above $1 million. Massachusetts has had a flat-rate individual income tax since 1917. Further analysis of the amendment, including its potential economic impact, is available here.
Michigan Tax Changes Effective January 1, 2023
Michigan will increase its gas tax by 1.4 cents per gallon due to an automatic inflation adjustment required by state law. The annual adjustment is set at 5 percent or the annual rate of inflation, whichever is lower.
Mississippi Tax Changes Effective January 1, 2023
Mississippi will move to a flat individual income tax structure as a result of H.B. 531, enacted in April 2022. Effective January 1, 2023, the current 4 percent tax on taxable income between $5,000 and $10,000 will be eliminated, leaving a single rate of 5 percent on income exceeding $10,000. The flat rate will then phase down to 4.7 percent in 2024, 4.4 percent in 2025, and 4.0 percent in 2026.
Missouri Tax Changes Effective January 1, 2023
In October 2022, Missouri legislators passed S.B. 3, a bill to expedite planned individual income tax rate reductions and replace existing tax triggers with triggers that reduce the top marginal rate further and faster than planned in previous legislation enacted in 2014 and 2021. Effective January 1, Missouri’s top marginal individual income tax rate will be reduced from 5.3 to 4.95 percent, and the amount of income that is exempt from Missouri’s individual income tax rates will increase from $100 to $1,000. Existing triggers seek to eventually reduce the top rate to 4.5 percent.
Additionally, Missouri’s economic nexus law for remote sales tax collections will take effect on January 1. As a result of the enactment of S.B. 153 in June 2021, the state will require remote sellers and marketplace facilitators with more than $100,000 in annual sales into Missouri to collect Missouri’s state and local sales tax. Missouri is the final state with a sales tax to put these requirements into place.
Nebraska Tax Changes Effective January 1, 2023
In 2022, Nebraska enacted several tax reforms that will take effect on January 1. Under L.B. 873, enacted in April 2022, Nebraska will reduce both its top marginal individual income tax rate and its top marginal corporate income tax rate to 5.84 percent by 2027. The individual income tax will be reduced by 0.2 percentage points per year, with an initial reduction from 6.84 to 6.64 percent in 2023. The top marginal corporate income tax rate will decrease from 7.5 to 7.25 percent effective January 1, as a result of L.B. 432, enacted in May 2021. The 2022 reforms also expedite a preexisting phase-in of an income tax exemption for Social Security benefits. In 2023, taxpayers may deduct 60 percent of Social Security benefits included in federal adjusted gross income (AGI), up from 40 percent in 2022. The same law also increases funding for tax credits issued under the Nebraska Property Tax Incentive Act, allocating $560.7 million for income tax credits to offset a portion of school district property taxes paid and $100 million to offset a portion of community college property taxes paid.
Separately, following the enactment of L.B. 310 in February 2022, Nebraska will reduce the inheritance tax for all classes of beneficiaries, including immediate relatives, remote relatives, and non-related individuals, by reducing rates and increasing exemptions. The lower rates and higher exemptions will apply for beneficiaries of decedents dying on or after January 1, 2023.
New Hampshire Tax Changes Effective January 1, 2023
New Hampshire will begin phasing out its income tax on interest and dividends income in 2023, bringing the rate down from 5 to 4 percent. This is the result of H.B. 2, enacted in June 2021. The rate is scheduled to phase down by one percentage point per year until the tax is phased out entirely in 2027.
Separately, H.B. 1221, enacted in June 2022, reduces the Business Profits Tax (New Hampshire’s version of a corporate income tax) rate from 7.6 to 7.5 percent for taxable periods ending on or after December 31, 2023, meaning the 7.5 percent rate will apply throughout calendar year 2023.
New Jersey Tax Changes Effective January 1, 2023
On January 1, New Jersey’s recreational marijuana excise tax (called the Social Equity Excise Tax Fee) will increase from $1.10 to $1.52 per ounce.
New York Tax Changes Effective January 1, 2023
New York’s budget for fiscal year 2023, enacted in April 2022, 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 percent 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 percent. For tax year 2022, the tax rates on those levels of income are 5.85 and 6.25 percent, respectively.
Additionally, New York is set to resume collection of its motor fuel excise tax, state sales tax on fuel, and Metropolitan Commuter Transportation District sales tax on motor fuel and diesel motor fuel on January 1, 2023. The suspension of those fuel taxes provided a price reduction of 16 cents per gallon since June 1, 2022.
North Carolina Tax Changes Effective January 1, 2023
North Carolina’s flat individual income tax rate will decrease from 4.99 to 4.75 percent for 2023 as a result of S.B. 105, the 2021 Appropriations Act, which was enacted in November 2021. Future scheduled reductions enacted under this same law will ultimately bring the rate to 3.99 percent in 2027 and phase out the corporate income tax entirely by 2030.
Starting in 2023, the law also simplifies the franchise tax, North Carolina’s capital stock tax, in a manner that will reduce franchise tax liability for many businesses. Specifically, instead of requiring businesses to calculate their franchise tax liability under three different bases and remit under the base that generates the highest tax liability, businesses will remit franchise taxes based solely on their North Carolina-apportioned net worth.
An inflation adjustment to North Carolina’s gas tax will take effect in January, increasing the tax from 38.5 to 40.5 cpg.
Beginning January 1, 2023, taxpayers are required to add back on their state income tax forms expenses deducted at the federal level to the extent those expenses were paid for using forgiven Paycheck Protection Program (PPP) loans. The add-back was first enacted in 2020, but in 2021, its implementation was suspended until January 1, 2023.
Oklahoma Tax Changes Effective January 1, 2023
With the enactment of H.B. 3418 in May 2022, Oklahoma became the first state in the nation to make permanent a 100 percent bonus depreciation allowance (“full expensing”) for qualifying investments in machinery and equipment. Many states allow corporations to fully deduct capital investments as part of their state’s conformity to the 2017 federal tax reform law, but the federal bonus depreciation allowance in Section 168(k) is scheduled to begin phasing down in 2023, with only 80 percent bonus depreciation allowed in 2023.
Separately, although marketplace facilitators were already responsible for collecting and remitting sales and use taxes on online sales in Oklahoma, they will be required to comply with any other local taxes levied on retail sales of tangible personal property in the state as of January 1, due to the enactment of S.B. 1339.
Pennsylvania Tax Changes Effective January 1, 2023
The enactment in July 2022 of H.B. 1342, part of the state’s FY 2022-23 budget, will reduce the corporate net income tax (CNIT) rate from 9.99 percent to 8.99 percent on January 1, 2023. Each year thereafter, the rate will decrease by 0.5 percentage points until it reaches 4.99 percent at the beginning of 2031. Further analysis of the CNIT rate cut can be found here.
Rhode Island Tax Changes Effective January 1, 2023
Beginning January 1, taxpayers will be allowed to subtract any military service pension benefits included in federal adjusted gross income (AGI) when calculating their income for Rhode Island income tax purposes. 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.
South Dakota Tax Changes Effective January 1, 2023
South Dakota has a property tax assessment limit that freezes property assessments for qualifying South Dakota residents who are 65 or older or are disabled as defined by the Social Security Act. Beginning January 1, the property valuation limit will be adjusted for inflation in determining eligibility for the program.
Utah Tax Changes Effective January 1, 2023
Utah’s motor fuel (gasoline) and special fuel (diesel) tax rates, which are adjusted based on the three-year average price of fuel, will increase by 4.5 cents on January 1, 2023. The new rate for both gasoline and diesel will be 36.4 cents per gallon.
Vermont Tax Changes Effective January 1, 2023
Starting January 1, Vermont’s throwback rule will be repealed, and the state will shift to using a single sales factor apportionment formula. At the same time, the state is expanding its corporate alternative minimum tax schedule, with a new top payment of $100,000 for companies with gross receipts greater than $300 million. These changes stem from the enactment of S.B. 53 in 2022.
Virginia Tax Changes Effective January 1, 2023
Under the two-year budget enacted in June 2022, the Commonwealth’s 1.5 percent sales tax on groceries and certain personal hygiene products is repealed effective January 1, 2023. However, the 1 percent local sales tax will continue to apply to those purchases.
Separately, retired servicemembers ages 55 and older will be eligible to subtract up to $20,000 in military benefits when calculating taxable income in 2023, up from $10,000 in 2022. This amount is scheduled to increase to $30,000 in 2024 and $40,000 in 2025.
Washington Tax Changes Effective January 1, 2023
Washington residents may see price increases resulting from an increase in the state’s carbon emissions fee that was adopted as part of Initiative 1631, adopted by voters in 2018. Estimates of the increased cost to consumers vary widely.
On January 1, the maximum Business and Occupation (B&O) tax credit for small businesses will increase, with amounts dependent upon business classification.
Additionally, starting January 1, qualifying transfers of real property to be used for low-income housing will be exempt from the real estate excise tax (REET).
Wisconsin Tax Changes Effective January 1, 2023
Effective January 1, 2023, Wisconsin will conform to the federal net capital loss deduction as a result of S.B. 339, enacted in March 2022. Under federal law, up to $3,000 in capital losses can be deducted against ordinary income annually, but Wisconsin currently limits its net capital loss deduction to $500.