The few minor legislative tax changes that occurred in several states in 2007 were kind to taxpayers both large and small.
Among the most notable changes, Florida residents saw the repeal of the state's intangibles personal property tax effective Jan. 1, 2007, while residents of Puerto Rico saw the elimination of the commonwealth's 10% income tax bracket, a slight reduction in two other tax brackets, and a broadening of the minimum threshold income levels, according to annual tax data for single taxpayers.
Rich Raphael, executive managing director and an analyst in the state rating group at Fitch Ratings, said the phase-out of Florida's intangibles tax was widely anticipated since legislators had been reducing it incrementally for a number of years leading up to the repeal.
While it benefits taxpayers, the repeal will have a minimal effect on the state's overall fiscal health.
"It wasn't a very large item in their revenues," Raphael said. "The phase-out is something that we planned for."
The decline in revenue due to an ailing real estate market was more of a negative factor on the state's economy in 2007 by comparison, he noted.
"That was a more significant factor," Raphael said. He added that with diminished real estate activity, Florida lost revenue that typically come from a document-stamp tax levied on contracts, such as those associated with real estate transactions.
If anything, the repeal of the intangibles tax will work in the state's favor in terms of generating tourism and population growth.
"Florida has no income tax and now no intangibles tax, so this is just another incentive to locate to or stay in Florida," Raphael said.
Under legislation signed by then-Gov. Jeb Bush in July 2006, the state's residents are now free of the former intangibles tax imposed annually on items such as stocks, bonds, mutual funds, money market funds, and unsecured notes. The tax was based on the fair market value of personal assets as of the Jan. 1 tax year, after an annual exemption of the first $250,000, according to the Florida Department of Revenue.
However, there are some exceptions to the repeal. According to the department's Web site, the intangibles tax on leases of government-owned real property and the one-time intangibles tax on notes secured by a mortgage on Florida real property are still in effect.
In Puerto Rico, legislators last year raised the minimum income level for taxpayers in the lowest 7% tax bracket to $17,000 from $2,000, and at the same time eliminated the 10% tax bracket and reduced the 15% and 28% tax brackets to 14% and 25%, respectively.
Puerto Rico's highest 33% tax bracket remained unchanged for those who earn over $50,000.
Meanwhile, 2007 could potentially be the very last year that none of the 50 states legislated any changes in the tax status of municipal bonds issued in or out of state, as an upcoming decision by the U.S. Supreme Court in the Kentucky v. Davis case could put an end to the status quo among the majority of states that exempt their own bonds and tax out of state bonds.
The case has drawn national attention after a Kentucky couple successfully challenged the constitutionality of the state's practice of taxing the interest earned on out-of-state bonds while exempting bonds issued in-state. A state appeals court agreed with the couple that the practice violates a clause in the U.S. Constitution stating that only Congress can act as a barrier to interstate trade. If the Supreme Court upholds the lower court ruling, it could also pose significant ramifications on how states will assess the interest on both in-state and out-of-state bonds going forward.
Meanwhile, taxpayers in several other states, including Arizona, North Carolina, Ohio, Oklahoma, and the District of Columbia, saw their tax rates reduced, while South Carolina had its 2.5% lowest tax bracket eliminated and replaced with a 3.0% minimum tax bracket for earners of under $5,200. Taxpayers who earn over $13,200 are still subject to a 7% top tax bracket.
Arizona saw tax rates reduced to a low of 2.59% from 2.73% for those who earn under $10,000 to 4.54% from 4.79% for those who earn over $150,000.
The top tax rate that affects North Carolina earners of income over $120,000 was reduced to 8% from 8.25% in 2006. Ohio taxpayers had tax rates reduced to 0.649% from 0.681% for those in the lowest tax bracket that earn under $5,000, and to 6.555% from 6.870% for those who earn over $200,000 in the top bracket.
A significant drop in Oklahoma's top tax rate in 2006, to 5.65% from 6.25%, was a boon for taxpayers who earn over $10,500.
In the nation's capital, the District of Columbia also saw a decrease in the tax rates from the prior year when legislators dropped the lowest tax rate for earners of $10,000 or less to 4.0% from 5.0%, and the highest tax rate for earners of over $40,000 to 8.5% from 8.7%.
Meanwhile, Hawaii and Michigan were the only two states where taxpayers saw brackets raised last year.
Hawaii taxpayers suffered a 20% rise in tax brackets from their 2006 levels when the minimum income level was raised to $2,400 from $2,000 for those in the lowest 1.40% tax bracket, and the maximum income level was raised to $48,000 from $40,000 for top earners in the 8.25% tax bracket.
Michigan earners as of Oct. 1, 2007, are now subject to a flat 4.35% tax rate - an increase from 3.9% in 2006, which results in an annualized rate of 4.01% for the 2007 tax year.