ARTICLE | August 23, 2022

 

Although the general election is in about three months, on Tuesday, Nov. 8, 2022, state elections matter for state and local tax policy. In an economically uncertain environment, the political makeup of legislatures and governors may have a significant impact as states navigate inflation, recession considerations, reduced pandemic recovery and fluctuating consumer spending. This article describes three quick state election takeaways for taxpayers looking to understand how state legislative and executive authorities may impact state tax policy in the years ahead.

1. Most of the legislative seats will be up for election

Legislative elections will occur in 46 states or 88 of the country’s 99 legislative chambers. Louisiana, Mississippi, New Jersey and Virginia will hold no general legislative elections this year. Nebraska’s unicameral legislature and only the state houses in Kansas, New Mexico and South Carolina will be on the ballot. All other states are holding elections for both chambers. Over 6,000 seats, or over 84% of the nation’s state legislatures, are 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.

The legislative election outcome may significantly affect state tax policy. Currently, Republicans control 31 state Senate chambers and 30 House chambers (excluding Nebraska’s unicameral legislature from both totals and Alaska’s coalition-controlled House). Democrats control 18 of each. Many states with Republican-controlled legislatures have reduced tax burdens over the past two years; Democratically-controlled legislatures generally have not. However, tax burdens alone are only one small and nuanced indicator of the business climate. While the economy and budget outlooks will affect tax policy developments, a change in legislative control could play an important role.

Voters in many states are unlikely to change the political landscape in state chambers dramatically. Deep blue states will likely remain under Democratic control, and deep red states will remain in Republican hands, but even the status quo will affect the ongoing tax policy debate. Whether significant changes occur, the legislature usually has a more subtle effect on tax policy than the executive branch. While party control may indicate whether more business-friendly tax policies are proposed versus revenue enhancements, many states have their own 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 the federal government.

2. Over 70% of the states are holding a gubernatorial election

Gubernatorial races will be held in another 36 states, with eight governors term-limited or not seeking reelection. Of those 36 elections, 20 currently have Republican and 16 have Democratic governors. Three gubernatorial elections are in states where the governor’s party affiliation is opposite the supermajority in the respective state’s legislature. For this article, a supermajority means holding at least a two-thirds majority in each chamber. Those states are Kansas, where Democrat Laura Kelly is running for reelection; Maryland, where Republican Larry Hogan is term-limited; and Massachusetts, with Republican Charlie Baker choosing not to run for a third term.

As we approach the 2022 midterms, there are 37 “trifectas,” where the party of both legislative chambers and the governorship are the same. Twenty-three states hold a Republican trifecta, including Nebraska with its unicameral legislature. Fourteen states hold a Democratic trifecta. Thirteen other states were divided, generally between the governor’s and the legislature’s party, as only three states hold legislative chambers of different party control. The more control a single party has over the legislative process; the more likely tax policy changes will have fewer hurdles. That said, 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.

In many respects, the outcome of gubernatorial elections has a greater impact on state and local tax policy than legislative elections. Many candidates stake out tax policy positions as part of their campaign platforms. If victorious, those candidates will at least try to pursue the tax policies on which they ran through annual budget proposals. The success of the new or returning governors depends, of course, on the party makeup in the legislature and the state’s respective budget and economic concerns.

3. Ballot measures begin to take shape

A number of state tax-related ballot measures will be confirmed or potentially voted on in November. Some of these measures are still under consideration or the subject of potential litigation and may ultimately be edited or removed. New measures may also be finalized over the next few weeks. The following is a summary of several notable measures as of the date of this article:

  • Colorado Proposed Initiative 31 (individual income tax reduction): This measure will reduce the individual income tax rate from 4.55% to 4.40%. A similar measure was approved in 2020, lowering the individual income tax rate to 4.55% from 4.63%.
  • Idaho Proposition 1, Quality Education Act: This measure increases the corporate income tax rate to 8% and the marginal individual income tax rate on individuals earning over $250,000 to 10.925% to support education funding, effective Jan. 1, 2023.
  • Maryland marijuana legalization amendment: This amendment amends the state constitution to legalize recreational marijuana and directs the legislature to address regulation and taxation. It was referred to the ballot through the legislature passing House Bill 1 (2022).
  • Massachusetts individual income tax increase: This measure creates a 4% tax on incomes that exceed $1 million and is used for education and transportation. For more information, please read our article, Massachusetts so-called Millionaires’ Tax heads to 2022 ballot.
  • South Dakota Initiated Measure 27 (marijuana legalization): This measure legalizes the use and possession of marijuana. While South Dakota passed a similar measure in 2020, it was subsequently overturned for having addressed more than one subject, i.e., legalization, taxation and regulation. While Initiated Measure 27 does not address the imposition of tax on any marijuana-related activity, it is presumed that, if approved, a taxing regime could follow.

Takeaways

Businesses across the country should be aware of the potential changes in the makeup of state legislatures and governors’ offices. New legislators and governors often bring new tax and budget policy initiatives to the state. In addition, businesses should be aware of the impact of the various ballot measures. Many of these measures will have an ongoing impact on tax burdens for both business entities and individual owners. Perhaps most importantly, businesses must be aware of state tax policy proposals in an uncertain and inflationary environment. For example, there have been proposals to adopt new gross receipts taxes, create new pass-through entity taxes and expand the sales tax base to include more services and further capture the digital economy. While the end of the fiscal year 2022 saw states flush with federal pandemic relief money and moderately high and stable personal income tax and sales tax collections, some of these dynamics are likely one-time events, and the states will likely anticipate lower near-term tax collections.

State and local tax elections and ballot measures can have significant and long-term impacts on tax policy. Over 15 states have cut personal income tax rates, corporate income tax rates or both in just the last two years. The states have experienced healthy state tax revenue collections due, in some part, to federal pandemic relief for individuals and state governments, as well as higher incomes bolstering individual income tax collections. New taxes on recreational marijuana have generated hundreds of millions of dollars while more states permit online gambling every year, further benefiting from the tax revenue.

Looking forward to 2023, 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 sharply lower tax revenue collections. Taxpayers must be flexible and have a plan to monitor federal and state changes for potential impacts on their state and local tax footprint.

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This article was written by Brian Kirkell, Mo Bell-Jacobs, David Brunori, Anna Cronic and originally appeared on 2022-08-23.
2022 RSM US LLP. All rights reserved.
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