State tax policy outlook: 2024 election preview

State and local elections and ballot measures can have significant and long-term effects on tax policy, as the last few years have demonstrated. Elected lawmakers in more than two dozen states have cut personal income taxes, corporate income tax rates or both, as states have experienced healthy tax revenue collections due to federal pandemic relief for individuals and state governments, as well as higher incomes that have bolstered individual income tax collections.

Similarly, the direction that state tax policies take from here will depend on outcomes of numerous down-ballot elections and measures in the general election on Tuesday, Nov. 5.

In this article, we examine the 2024 state election landscape and what it could mean for taxpayers and state tax decision makers.

Background: Healthy budgets helping state and local taxpayers

Other than rate reductions, state and local governments have made few significant policy changes since the 2017 Tax Cuts and Jobs Act (TCJA) and the response to the U.S. Supreme Court’s decision in South Dakota v. Wayfair in 2018. Since the turn of the decade, federal pandemic aid, higher salaries, positive market performance and the rolling impact of inflation have helped sustain state budgets. In turn, there have been many income tax cuts (through rate reductions, rebates or other mechanisms), minor sales tax base expansion, and very few rate increases for any tax type.

In lieu of sweeping rate increases and base expansion, state and local tax trends have encompassed P.L. 86-272 expansion, albeit on a slower basis; modification to state pass-through entity workaround taxes; elimination of sales and use tax nexus transaction thresholds, and more proposals to tax the digital economy.

More recently, state legislatures have, for the most part, passed moderate (and minimally impactful) tax policy as larger budget shortfalls emerged in only a handful of states through fiscal year 2024. However, collections for the prior 18 months have slowed. They could be even lower in the next year as pandemic aid distributions end, wage growth slows, inflation eases, and higher (albeit likely declining) interest rates ripple through various sectors of the economy.

State governments brace for little change

Legislative control

One-party control of most state legislatures has resulted in legislative dynamics that favor advancement of policy priorities. Many states with Republican-controlled legislatures have reduced tax burdens over the past few years through personal or corporate income tax rate cuts, while Democratic-controlled legislatures have not broadly raised rates.

Entering this election, a record-high 40 states have so-called trifectas—in which a single party controls the executive and both chambers of the legislature. Single-party control of the state legislature exists in 48 states, with Pennsylvania and Alaska the exceptions.

Few, if any, state legislatures are expected to flip their respective majority in November, given the wide margins of partisan control in most states’ chambers. The potential exceptions include narrowly controlled chambers in Arizona, Michigan, Minnesota and Pennsylvania. Overall, approximately 5,800 state seats among 85 state legislative chambers are up for election in 2024—approximately 80% of state seats nationwide.

Legislative control may affect future individual or corporate rate cuts, expansion of business tax credits, apportionment and filing methodology, and net operating loss expansion or contraction. Of course, tax burdens are only one indicator for business climate. The overall economy, interest rates, employment rates, federal tax policy and quality of life will also significantly affect the states and where individuals and businesses choose to invest.

Executive control

Fewer governors will face voters in 2024, with only eleven states electing a new executive, including Delaware, Indiana, Missouri, Montana, New Hampshire, North Carolina, North Dakota, Utah, Vermont, Washington and West Virginia.

North Carolina and Vermont will be states to watch. Both current governors are of opposing parties from their respective state legislatures.

In North Carolina, Democratic Gov. Roy Cooper is term limited and has contended with a veto-proof Republican majority legislature.

In Vermont, Republican Gov. Phil Scott is seeking a fifth term, and has faced a veto-proof majority in the Democratic-controlled legislature.

Governors of a party different from their legislatures have faced tough tax policy decisions in recent years. The governors of Kansas, Kentucky, North Carolina, Vermont and Virginia are just a few examples of executives that had to scale back their tax policy platforms or face veto overrides due to opposing party control of the legislature. Even in trifecta states, governors rarely have blank checks and often must consider the economy, revenue replacement and spending cuts to deliver on tax policy goals.

Voters to decide tax-related ballot measures

Even with several months until elections, ballot measures continue to fluctuate due to litigation and last-minute additions. New measures may be finalized over the next few weeks or stricken from ballots.

A few notable measures on state ballots as of the date of this article are described below. Note, there are many other tax referenda and initiatives on the November ballot; most will focus on property tax issues.

• Colorado legislatively referred measure creating a 6.5% excise tax on firearms, parts, and ammunition
• Colorado initiative would limit property tax revenue to 4% growth above the total statewide property tax revenue collected in the previous year; and requiring statewide voter approval if property tax revenue is projected to increase by more than 4%
• Florida Amendment 3 legalizes recreational marijuana. While not directly addressing taxation, presumably the sale of marijuana would be subject to the state sales and use tax under existing law
• Georgia constitutional amendment to create a new tax court that would be under the judiciary and would replace the current Georgia Tax Tribunal
• Georgia legislatively referred measure to increase the personal property tax exemption to $20,000 from $7,500
• Illinois advisory question on whether to amend the state constitution to create an additional 3% tax on incomes over $1 million. Note that this is an advisory measure and would not mandate or create such a tax
• Oregon Measure 118 would place an additional 3% tax on businesses with over $25 million in sales. The tax will be used to provide a rebate to all individuals residing in the state for more than 200 days
• South Dakota Measure 28 would prohibit a tax on anything sold for human consumption, e.g., groceries, but would exclude alcohol and prepared food
• South Dakota Measure 29 would legalize recreational marijuana. While not directly addressing taxation, a previous legalization measure, which passed and was later found unconstitutional, included a 15% tax on sales
• Washington Initiative 2109 would repeal the 7% capital gains tax on net gains in excess of $250,000 originally effective in 2022

Beyond the election: Expiring TCJA provisions and fresh unknowns

As long as state revenues continue to be moderate, broad-based tax changes seem unlikely. Any increases are likely to be incremental, such as expansion of the sales tax base to more services, and the exploration of more robust taxation of the digital economy, including professional services and data taxes.

However, certain localities and urban areas continue to struggle following the pandemic with slow tourism recovery and the popularity of hybrid and remote work. Reduced local revenues from fewer workers soliciting restaurants, commuting to offices, using public transportation, and holding happy hours may result in more aggressive and broad-based local taxation.

Looking forward to 2025, new governors and legislative bodies will begin to propose and consider tax legislation that may increase state and local tax burdens as revenue forecasts project slower growth, if not lower tax revenue collections overall.

Additionally, 2025 almost certainly will feature one of the largest federal tax bills in years because approximately 35 provisions in the Tax Cuts and Jobs Act of 2017, including the state and local tax deduction limitation, are scheduled to expire at the end of 2025. Taxpayers must be prepared for the eventual—and likely delayed—response from the states.

Although there is bipartisan support for a number of business tax proposals, including section 163(j) (business interest expense), section 174 (research and experimental costs) and section 168(k) (bonus depreciation), expect the outcome of the 2024 federal elections to have profound effects on state tax policy.

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. Consult with your state and local tax policy advisors for more information.