Tax alert

Election results on state tax issues underscore the need for flexibility

State policymakers could be reluctant to pursue more tax reductions

Nov 21, 2022
Business tax State & local tax Election Tax policy

Executive summary: State and local tax election recap

With 37 trifectas at stake and over 6,200 state legislative seats up for grabs, the 2022 state and local government elections provided few surprises, but taxpayers must remain vigilant and prepared for 2023 state tax policy changes. 

How state and local election results affect taxpayers 

Conversations around the 2022 midterms have been laser-focused on red waves, the referendum on the Biden presidency and control of Congress. Not to be overlooked are the stakes at the state level—36 state governor races, over 6,200 seats up for grabs in state legislatures and noteworthy ballot initiatives in local elections. 

A high-level summary of the outcome of those elections follows, including a preview for taxpayers preparing for 2023. Additionally, we caveat that some of the results remain close, and some races may be subject to legal challenges that could impact our summary. 

36 gubernatorial elections with incumbents winning big 

Gubernatorial races were held in 36 states and the District of Columbia (mayorship), with eight governors term-limited or not seeking re-election. Of those 36 elections, Republicans held 20 governorships and Democrats 16 coming into the election. The early outcome was that most of the governorships remained in control of the same party, with incumbent governors winning in every election, except in Nevada, where the incumbent Democrat lost. As expected, Democrats secured governorships in both Maryland, where Republican Larry Hogan was term-limited, and in Massachusetts, where Republican Charlie Baker chose not to run for a third term. Arizona was also a tight race that was recently called for the Democrat Katie Hobbs, flipping the executive for the next four years.

Coming into midterms there were 37 “trifectas,” a term that refers to situations in which the party of both state legislative chambers and the governorship are the same. Twenty-three states held a Republican trifecta, including Nebraska with its unicameral legislature. Fourteen states held a Democratic trifecta. Thirteen other states were divided, generally between the governor's and the legislature's party, as only three states had legislatures with a differing party in control of each chamber. 

The more control a single party has over the legislative process, the more likely that tax policy changes will have fewer hurdles. However, tax bills were enacted over the governor’s veto in Kansas, Maryland and Massachusetts at least once during each of those governor’s respective terms. Of those 37 trifectas, 35 were on the ballot, while Mississippi and New Jersey—a Republican and Democrat trifecta, respectively—held no state office elections. 

Democrats picked up two new trifectas with gubernatorial wins in Maryland and Massachusetts. A third Democrat trifecta pickup occurred in Minnesota, with the re-election of Gov. Tim Walz and the earning of the state Senate by a 34 to 33 margin. And finally, a fourth trifecta was gained in Michigan with the re-election of Gov. Gretchen Whitmer and the Democrats winning both chambers from the Republicans. Overall, Republicans mostly played defense, picking up no new trifectas this election cycle as of the date of this article. There will be at least 39 trifectas beginning in 2023. 

State legislative control is mostly unchanged 

Legislative elections occurred in 46 states, accounting for 88 of the country’s 99 legislative chambers. Louisiana, Mississippi, New Jersey and Virginia held no general legislative elections this year. Nebraska’s unicameral legislature and only the state houses in Kansas, New Mexico and South Carolina were on the ballot. All other states generally held elections for both chambers. 

Over 6,200 seats, or more than 84% of the nation’s state legislatures, were on the ballot. Two of the 43 states holding elections for both chambers currently have a split-controlled legislature: Minnesota with a Republican-controlled Senate and a Democratic-controlled House, and Alaska with a Republican-controlled Senate and a coalition-controlled House, although the House has a majority of Republican members. Virginia also has split-party control, but its election cycle occurs in odd years.

As discussed above, Democrats picked up both chambers of the Michigan legislature and the Minnesota Senate to form new trifectas in those states. The Pennsylvania House has also been called for the Democrats, leaving the likely count at four legislative chambers flipped by the Democrats and no chambers gained by the Republicans, although it should be noted that the Republicans will continue to hold more chambers nationwide. 

Governors in split-controlled states may be more easily subject to a veto override. Both Kansas and Kentucky have Democratic governors with supermajority Republican legislatures, meaning overrides could occur, as they already have in the past year or so concerning tax bills. Additionally, while majority rule may be beneficial, in many cases, legislators and governors will need to work with opposing parties to address key tax and expenditure issues.

While the U.S. Congress can be subject to considerable swings in party makeup from one session to another, the state legislative landscape moves much slower, as reflected in the 2022 results. Party control may indicate whether more business-friendly tax policies are proposed versus revenue enhancements. Many states have state-specific tax concerns due to differences in their respective economies, industry and population, making generalizations about party tax policy more complex in the states than in the federal government. Economic conditions in the coming few months may also be more meaningful than political affiliation. 

Ballot measures targeted tax rates

Several state-tax related ballot measures addressing rate increases, rate decreases and marijuana legalization found voters taking different sides depending on the state and the issue. A summary of noteworthy measures follows. 

Individual income tax increases

In Massachusetts, voters decided on an individual income tax increase for millionaires. Approved by a small margin, the measure creates a 4% tax on incomes that exceed $1 million, effective 2023, and is intended for education and transportation funding. The application of this new tax will likely require legislative, regulatory and/or policy cleanup, which is expected in the coming months. For more information, please read our article, Massachusetts so-called Millionaires’ Tax heads to 2022 ballot.

Alternatively, California voters rejected a measure that would have increased individual income taxes on those earning more than $2 million a year by another 1.75%. That measure would have used the additional funding for electric vehicle infrastructure. 

Finally, Colorado voters once again approved a rate decrease in their individual and corporate state income taxes. The current rate of 4.55% is reduced to 4.4% effective on and after Jan. 1, 2022. 

Marijuana legalization

Marijuana legalization was on the ballot in five states—Arkansas, Maryland, Missouri, North Dakota and South Dakota. Only Maryland and Missouri approved the measures. With some states generating upwards of $500 million annually from legalization-related taxes, a once-minor revenue source is helping boost state budgets throughout the nation. However, due to infrastructure and regulatory processes, it may be a year or more before either state begins to collect tax revenue related to legalization. 

State tax policy takeaways for 2023

With a few exceptions, the landscape of state tax policy in 2023 is unlikely to change significantly as a result of the recent elections. Party control of the states remains largely the same. Incumbent governors generally won, and the legislative majorities, whether Republican or Democratic, experienced little change. 

Few, if any, governors or legislative leaders ran on the platform of dramatically changing their state’s tax system, and those that did, focused mostly on child tax credits or property tax relief. Notably, Arkansas Gov.-elect Sarah Huckabee Sanders discussed phasing out the individual income tax during her campaign following reductions made by the current governor. 

Over the past two years, nearly two dozen states reduced corporate and personal income taxes. Large budget surpluses, from an improving economy and federal aid, led to those reductions. However, there are serious concerns about the economy as the nation enters 2023, and a significant slowdown or recession will inevitably affect state budgets. Regardless of whether that occurs, state policymakers will be reluctant to pursue additional tax reductions. Current forecasts suggest that more states could see deficits by the end of the fiscal year, insights that likely weigh heavily on state legislatures preparing for a new session. 

Pressure for states to reduce corporate or personal income taxes will likely remain. Governors and legislators will ponder the effect of widespread income tax cuts on inter-jurisdictional competition. Some will be inclined to pursue new or further income tax reductions; the economic concerns will hamper those pursuits. At the same time, if the states need additional revenue, they are unlikely to increase personal or corporate income tax burdens.

With all these factors, the discussion will shift from income taxes to other forms of revenue. Excise taxes, online gambling, and some broadenings of the sales tax base are likely targets for state legislators in the coming year—if states must generate additional revenue. 

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