The personal income tax rate has emerged as the central point of contention between the House and Senate budget proposals. Differences between the chambers have put budget negotiations on hold.

If the state is to move forward, both chambers must be willing to cede ground and consider an alternative that balances fiscal responsibility with long-term economic growth.

Under current law, the personal income tax rate will drop to 3.99% in 2026. If specific revenue triggers are met, three further reductions are possible from 2027 through 2034. Each would be 0.5 percentage points.

The Senate proposed removing the revenue triggers needed for the rate to fall to 2.99%, keeping the trigger for the reduction to 2.49%, then adding two additional trigger-based cuts, each of 0.25%. In effect, the Senate’s proposal would guarantee reductions bringing the tax rate down to 2.99% and possibly as low as 1.99%.

In contrast, the House recommended substantially increasing the revenue triggers’ values. For example, the fiscal year (FY) 2026 trigger would increase from $33 billion to $36.3 billion, and for FY 2033, from $39 billion to $46.2 billion. In effect, this would make any rate reductions beyond 3.99% very unlikely.

Consensus revenue forecast

The May 2025 revised consensus revenue forecast projects the state will suffer a decrease in revenue in FY 2027. The report cites the continued personal income tax rate reductions as the culprit behind the looming fiscal cliff.

While the consensus revenue forecast has a poor track record on estimates released more than two years in advance and should be taken with a grain of salt, legislators should consider making the reductions 0.25 percentage points instead of 0.5.

Rate reductions

Since the launch of personal income tax rate reductions in 2014, the size of each cut has varied from 0.05 to 0.26 percentage points, with next year’s cut set at 0.26 points (from 4.25% to 3.99%). Additionally, the personal income tax rate remained unchanged in 2016, 2018, 2020, and 2021, providing time for the economy to respond and adapt to previous reductions.

Increasing the size of the rate reductions deserves attention because, as the personal income tax rate declines, the effect of even fixed rate reductions becomes greater. For example, a 0.25 percentage point reduction that takes a 5% rate down to 4.75% amounts to a 5% decrease in the rate, but the same cut from 2.5% to 2.25% is a 10% drop.

For perspective, next year’s reduction from 4.25% to 3.99% represents a 6.1% reduction, the most significant cut of the flat-tax era. A drop from 3.49% to 2.99%, which could happen in 2028, would be a decrease of 14.3%. Such a considerable rate reduction in one year could present budgetary challenges without an accompanying plan to decrease spending.

Revenue triggers

While the House’s proposed increase to the revenue triggers for personal income tax reductions is excessive, it is fair to question the underlying rationale for the existing trigger levels, which appear to have been set arbitrarily. For instance, the trigger thresholds climb sporadically — from $35.8 billion in FY 2029 to $36.5 billion in FY 2030, $38 billion in FY 2031, and $38.5 billion in FY 2032 — without a clear justification.

To its credit, the House’s proposal is not arbitrary; it uses actual and projected inflation and population growth to determine revenue triggers. However, the model is biased toward producing high revenue triggers because it applies FY 2023 and FY 2024 growth rates to the existing FY 2026 trigger of $33 billion to calculate its FY 2026 trigger of $36.3 billion. A more appropriate method would be to apply those growth rates to the total revenue budgeted for FY 2022 ($28.4 billion) or FY 2023 ($30.5 billion).

Spending growth

While I’ve focused on the mechanics of tax rates and revenue triggers, I would be remiss not to address the deeper issue: the ongoing desire to expand the size and scope of government.

Net General Fund appropriations are set to grow from $25.9 billion in FY 2022 to a proposed $32.6 billion in FY 2026 — an increase of 25.7%. This growth is driven largely by rising net General Fund appropriations for health and human services, which are expected to increase from $5.8 billion to $8.3 billion over the same period — a staggering 44.3% jump. In conjunction with more than $18 billion in education spending, these two categories exceed 80% of total net General Fund appropriations.

If the state continues with 0.5 percentage point rate cuts to the personal income tax, policymakers must be prepared to confront the fiscal reality that reductions in these high-expenditure areas may become unavoidable.

Policy recommendation

While the consensus revenue forecast has a history of underestimating revenue, accelerating rate cuts to 0.5 percentage points, when previous reductions were limited to half that size, may be overly ambitious.

Perhaps a middle ground can be found between the House and Senate tax plans. Budget writers should consider replacing the three 0.5 percentage point reductions with six 0.25 percentage point reductions spread over the same eight-year period. This approach would preserve the potential for the personal income tax rate to fall to 2.49% but do so in a more fiscally responsible manner, consistent with the measured strategy that has defined the past decade of successful tax reform.