Lowering the individual income tax rates in the third bracket and increasing and expanding the retirement income subtraction. (FE)
The legislation significantly impacts the state tax structure by providing substantial tax relief for retirees, particularly benefiting those in higher income brackets as it increases the retirement income subtraction. This reduction in tax liability is expected to encourage financial stability for seniors, allowing them to retain more of their income post-retirement. Additionally, this bill will necessitate adjustments to the state's revenue collection forecasts, as a decrease in tax rates and an expansion of exemptions will likely reduce overall tax revenue.
Senate Bill 435 aims to lower the individual income tax rates within the third bracket and expand the state income tax subtraction for retirement income. Effective for the 2023 tax year, the bill decreases the income tax rate from 5.3% to 4.4% for taxable incomes that exceed $15,000 but not $225,000. In addition, it increases the allowable tax subtraction for payments or distributions from qualified retirement plans for individuals aged 67 and older, allowing up to $100,000 to be subtracted annually from taxable income.
Points of contention surrounding SB 435 include concerns over its potential financial implications for the state's budget and the perceived unfairness of concentrating benefits primarily on higher-income retirees. Critics argue that while the bill is favorable for wealthier individuals, it does little to address tax equity for lower income earners and raises questions about the sustainability of such tax reductions in the long term. These concerns highlight the ongoing debate regarding the prioritization of tax cuts in the state legislature.