While the nation focuses on the 35 contested U.S. Senate seats, 435 U.S. House seats, and one of the most contentious presidential races in history, taxpayers should consider monitoring the hundreds of state and local elections and ballot measures up for approval on Nov. 3. Many of the legislative elections occurring in 44 states, gubernatorial races in 11 states, and countless ballot measures will affect state and local tax policy.
The victors will be tasked with responding to the ongoing COVID-19 pandemic and the continuing pressure on state and local public finances. Estimates for the collective state budget shortfalls due to the shutdowns and the coronavirus response exceed $200 billion over the next two fiscal years. While most state elections do not center on candidates advocating higher or lower tax burdens, constitutionally imposed balanced-budget requirements may leave winners little room to avoid increases.
Voters in at least 24 states will decide tax-related measures in November. In two states, the elections could dramatically change the tax policy landscape.
Noteworthy measures in California and Illinois
From a business perspective, California’s Proposition 15 could be significant. This measure would remove most commercial property from the property tax limitations created by Proposition 13 enacted in 1978. The current law requires that all property be taxed based on its acquisition or purchase value. The acquisition value cannot increase more than 2% a year.
Proposition 15 would effectively impose property taxes on commercial and industrial property at current market values. The residential and agricultural property would continue to be taxed based on acquisition value. The changes would be phased in beginning in 2022. Properties, such as retail centers, whose occupants are 50% or more small businesses would be taxed based on market value beginning in 2025. Notably, the ballot initiative would make an exception for properties whose business owners have $3 million or less in holdings in California; these properties would continue to be taxed based on their purchase price. If passed, the amendment is projected to raise between $6.5 billion to $11.5 billion in new revenue every year.
In Illinois, voters will decide the fate of a constitutional amendment that would repeal the requirement that state income taxes be imposed at a flat rate. The amendment would also expressly allow the state to enact legislation imposing graduated personal and corporate income tax rates.
Recall that in June 2019, Illinois enacted Senate Bill 687 imposing a graduated income tax for both individuals and corporations contingent on voters approving the amendment. If the amendment passes, the new individual rates would range from 4.75% to 7.99%, replacing the flat 4.95% rate. The corporate income tax rate would also increase to 7.99% from a current flat tax rate of 7%.
Other income tax measures
Arizona’s Proposition 208 would impose a 3.50% excise tax—in addition to existing income taxes—on income above $250,000 (for single filers) or $500,000 (for joint filers). The additional revenue will be earmarked for teacher salaries. The current Arizona income tax imposes a 4.5% rate on income over $159,000 (single filers) and $318,000 (joint filers). Based on current law, the ballot initiative would have the effect of increasing the tax rate from 4.50% to 8.00% on income above $250,000 (single filers) or $500,000 (joint filers).
In Colorado, voters have the opportunity to lower their income tax burdens. Proposition 116 would decrease the state income tax rate for individuals, estates, and trusts from 4.63% of federal taxable income to 4.55% for tax years beginning on and after Jan. 1, 2020. Domestic and foreign C corporations operating in Colorado would be subject to the same reductions.
Other property tax measures
Colorado Amendment B would repeal the Gallagher Amendment from 1982. The Gallagher Amendment limited the total residential and non-residential property tax bases to a specified ratio of total state property taxes. Over time, fluctuations in assessed value have resulted in significant rate differences between the two classes of property.
Marijuana, tobacco, and nicotine
In at least four states, voters will decide whether to legalize and tax marijuana. Arizona Proposition 207 would legalize marijuana and impose a 16% excise tax in addition to the state transaction privilege tax and use tax. Montana voters will have two marijuana-related ballot measures to consider: Constitutional Initiative 118, which would amend the state constitution to allow the legislature or the voters to establish a legal age for purchasing, consuming, or possessing marijuana—similar to alcohol; and Initiative 190, which would legalize recreational marijuana and impose a 20% tax on the sale of nonmedical marijuana. In New Jersey, voters will decide on Public Question 1 to legalize and subject marijuana to the sales tax. Unlike other states, the referendum does not create a special excise tax beyond the state’s 6.625% sales tax. However, local governments could be permitted to impose an additional 2% tax on cannabis sales if approved. Similarly, South Dakota citizens will vote on Amendment A to legalize, regulate and tax marijuana. The amendment would result in a 15% excise tax on marijuana sales.
In at least two other states, voters will decide on measures related to tobacco or nicotine. Colorado’s Proposition EE would impose a tax on nicotine liquids used in electronic cigarettes and other vaping products that is equal to the total state tax on tobacco products. Oregon’s Measure 108 would increase the cigarette tax and the tax imposed on nicotine inhalant delivery systems, including e-cigarettes.
In Louisiana, voters will decide Amendment 2, which deals with the valuation of property with oil and gas production for ad valorem purposes. Maryland voters will decide Question 2, a measure that would legalize—and tax—sport and event wagering in the state. Additional targeted tax-related measures are on the ballot in another dozen or so states.
The gubernatorial and legislative elections, as well as outcomes from state and local tax ballot measures, could have significant impacts on state tax policy. Businesses should be aware of how those election results can potentially affect their overall state and local tax burden. There will be enormous pressure on states responding to the pandemic and resulting budget shortfalls, as the newly elected or re-elected officials consider how to respond to CARES Act conformity and potential new federal tax relief.
In any event, state tax changes are coming, and there is a possibility that some states will increase sales tax burdens by expanding bases to include services and digital goods. There is also the possibility that some states will raise personal income taxes, particularly on higher-income taxpayers. So-called “millionaire’s taxes” have been proposed or discussed in at least California and Maine, and recently expanded into New Jersey. Some states may adopt new entity-level business taxes or gross receipts taxes like Oregon did earlier this year. The November elections will influence all of these possibilities.
Taxpayers should be monitoring both federal and state changes for potential impacts on their state and local tax footprint. In a time of such uncertainty, it is paramount to understand how election changes and potential 2021 legislative sessions could affect your current and future business operations.