State income tax policy remains one of the clearest dividing lines in American politics. During the 2026 legislative sessions, states moved in sharply different directions. Some pursued higher rates and wealth taxes to support expanded government spending. Others enacted tax cuts and advanced plans to eventually eliminate their income taxes. At the same time, voters in several states may soon decide major tax questions at the ballot box.
This three-part series examines those developments. The first article provides an overview of the income tax legislation enacted across the states in 2026. The second explores the competing fiscal philosophies behind those decisions, contrasting states focused on spending restraint and tax relief with those seeking a larger role for government financed by higher taxes. The final article focuses on Colorado, where one of the nation’s strongest taxpayer protections, the Taxpayer Bill of Rights (TABOR), has become the center of an ongoing political battle. As efforts to weaken or circumvent TABOR continue, Colorado offers a revealing case study of the broader debate over taxes, spending, and the proper size of government.
The states are moving in two very different directions in implementing tax policy. Some are expanding government and raising taxes, with a dozen states enacting new wealth taxes since 2024. Others are reducing income tax rates through legislative reforms and revenue-triggered tax cuts. Since 2021, 26 states have lowered their income tax rates. A review of tax legislation enacted across the nation in 2026 offers a revealing look at which path states are.
States that have recently raised taxes are primarily doing so by instituting “wealth” taxes, an aptly-named reference to taxes on an individual’s net wealth, or pseudo-wealth taxes that raise income tax rates only in the highest tax brackets. The state of Washington, which previously did not even have an income tax, adopted a new income tax this session at a rate of 9.9% that applies only to income over $1 million. This pseudo-wealth tax is said to be needed to fund childcare programs, free school meals, tax credits for working families and tax breaks for small businesses.
Hawaii has also targeted its top income tax tier this session, increasing their top rate from 11% to 13%, which policymakers refer to as their “millionaire’s tax.” Policymakers ratcheted up taxes to solve a budget shortfall and pushed Hawaii into second place for highest top income tax, trailing only California.
The Maine legislature has also approved a slightly different iteration of the wealth tax, establishing a 2% surcharge on income over $1 million.
In November, California voters will get to weigh in on a proposed constitutional amendment instituting a “billionaire’s tax.” California’s 2026 Billionaire Tax Act “would impose a one-time tax of 5 percent on the net worth of the state’s billionaires.”
Finally, in Colorado, the legislature advanced Initiative 195, which proposes to take Colorado from its current 4.4% flat tax to a six-bracket graduated income tax beginning in 2027. The graduated brackets would top out at 8.4%. If enough signatures are gathered, Colorado voters will consider this initiative in November.
On the flip side of the coin, several states enacted significant income tax reductions in 2026. South Carolina has passed the most extensive reform, which will eventually lead to the elimination of their income tax. South Carolina now joins Oklahoma, Mississippi, and West Virginia in passing income tax reform measures which gradually lead to the elimination of their income tax.
Prior to the new law, South Carolina had a progressive income tax with three brackets and a top rate of 6%. Starting in tax year 2026, the brackets will be consolidated to two with a bottom rate of 1.99 percent and a top rate of 5.21 percent.
Arkansas is also building upon its previous income tax reforms by passing a measure to reduce the state’s top individual income tax rate to 3.7%, retroactive to January 1, 2026. It will also reduce the state’s top corporate income tax rate to 4.1%, effective beginning January 1, 2027.
West Virginia and Georgia are also lowering tax rates, combined with implementing revenue triggers to automatically lower rates further. West Virginia’s top tax rate will fall from 4.82% to 4.58%, and its revenue trigger will gradually lower the rate until the income tax is eliminated. Similarly, Georgia’s flat tax is now reduced from 5.19% to 4.99%, and a revenue trigger will further lower the rate until it reaches 3.99%.
Indiana, Kentucky, and Utah have also been gradually lowering income taxes. Indiana has now lowered its flat tax from 3% to 2.95%, and will further reduce it to 2.9% in 2027. Kentucky lowered its flat tax from 4% to 3.5%, and is on the path toward elimination through gradual reduction. Finally, Utah, which has been consistent in enacting pro-growth tax reforms, lowered its flat income tax and corporate tax rates from 4.5% to 4.45%.
Certain states are using constitutional amendments to protect taxpayers, including Iowa and Missouri, and potentially North Carolina. In Missouri, the legislature advanced a constitutional amendment that, if approved, would phase-out and prohibit the income tax. The amendment would use surplus revenue to gradually lower income tax rates and allow the legislature to expand the sales tax base for the exclusive purpose of lowering income tax rates.
Iowa’s constitutional amendment would require a two-thirds vote in both legislative chambers to raise the income tax. Voters will consider the supermajority amendment this November, and if approved, it would provide an important safeguard against future tax increases, whether that be attempted through higher rates or institution of a wealth tax.
North Carolina is still in session, but its Senate is advancing a constitutional amendment to cap their flat tax at 3.5%. North Carolina currently has a 3.99% flat tax, which is scheduled to be lowered to 3.49% in 2027.
The contrast in state tax policy could not be clearer. While some states are expanding government and asking taxpayers to shoulder a larger burden, others are pursuing reforms designed to leave more money in the hands of families and businesses. As these competing approaches continue to unfold, their long-term impact on economic growth, population trends, and state competitiveness will be closely watched.
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