The often tumultuous 2020 state and local election season is coming to a close. There were many contests that affected state and local tax policy throughout the nation, including legislative elections in 44 states and gubernatorial races in 11 states. There were also numerous ballot measures raising—or lowering—tax burdens. Both the elections and ballot measures have the potential to change state and local tax policy on a large or small scale. Newly elected or reelected political leaders will have to address the ongoing COVD-19 pandemic and the continuing pressure on state and local budgets, especially as cases increase heading into the winter season.
Businesses across the country should be aware of the changes in the makeup of state legislatures and governors offices. New legislators and governors often bring new tax and budget policy ideas to the state. In addition, businesses should be aware of the impact of the various ballot measures, including those passed at the local level. Many of these measures will have a significant impact on tax burdens for both business entities and individual owners. Perhaps most importantly, businesses need to be cognizant of state tax policy proposals arising from the pandemic-related budget short falls. For example, there have been proposals to adopt new gross receipts taxes, pass-through entity taxes and expand the sales tax base to include digital goods and services. As equally important, many states will consider reducing tax burdens as a way of spurring the economic recovery.
Set forth below is a brief overview of the state and local tax-related 2020 election results.
Ballot measures recap
The following is a brief summary of whether several noteworthy tax-related ballot measures passed or failed. Regardless of the outcome, states will still have shortfalls to contend with and legislative tax increases are anticipated. The following measures may be just the start of state and local tax changes coming in 2021.
Income and property taxes
- Arizona Proposition 208: (PASSED) imposes an additional 3.5% increase on certain higher incomes.
- California Proposition 15: (FAILED) allows certain commercial property to be assessed on current market values rather than on acquisition value, beginning in 2022.
- Colorado Amendment B: (PASSED) repeals a limit that total residential and nonresidential property tax bases had to remain at certain ratios of total state property taxes.
- Colorado Proposition 116: (PASSED) lowers income tax rates for individuals and corporations to 4.55% from 4.63%.
- Illinois Amendment 1: (FAILED) would have repealed the flat income tax rate requirement and replaced it with the graduated rate structure passed in 2019.
Marijuana, tobacco and nicotine
- Arizona Proposition 207: (PASSED) legalizes recreational marijuana and imposes a 16% excise tax.
- Colorado Proposition EE: (PASSED) imposes a tax on nicotine liquids and increases cigarette tax.
- Montana Initiative 190: (PASSED) legalizes recreational marijuana and imposes a 20% tax on nonmedical marijuana.
- New Jersey Public Question 1: (PASSED) legalizes marijuana and subjects it to the state sales and use tax; authorizes local governments to impose an additional tax.
- Oregon Measure 108: (PASSED) increases the cigarette tax.
- South Dakota Amendment A: (PASSED) legalizes marijuana and imposes a 15% excise tax.
State and local tax elections and ballot measures can have significant and long-term impacts on tax policy. While some states have seemingly avoided tax increases or new taxes due to pandemic shortfalls, state rainy day funds and delaying scheduled rate reductions may not be enough to avoid tax increases all together.
While not discussed in detail in this article, there will be broad political changes in state legislatures and governorships. Of the 11 governor races (Delaware, Indiana, Missouri, Montana, North Carolina, North Dakota, New Hampshire, Utah, Vermont, Washington, West Virginia), nine were reelection campaigns, with only the Montana and Utah races without an incumbent candidate. Montana was the only state to change governor political parties. Both the Democratic and Republican parties held a number of state trifectas—where the same party controls both legislative chambers and the governorship. As election results continue to roll in over the next few days, there will be changes to party control in both chambers of state legislatures, bringing corresponding changes to how many trifectas each party holds. The more control a single party has over the legislative process, the more likely tax policy changes will have fewer hurdles. Montana is a good example of one of these states as the Republican Party will hold the state trifecta in 2021 for the first time in a number of years.
Looking forward to 2021, new governors and legislative bodies will begin to propose and consider tax legislation that may increase state and local tax burdens, at least to recover and return to pre-pandemic revenue projections. Taxpayers must be flexible and have a plan to monitor both federal and state changes for potential impacts on their state and local tax footprint. An extended pandemic makes it all the more likely that state tax changes are coming.