Election results have significant impact on state and local tax

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November 2020

Overview

The outcome of the 2020 federal and state elections will have a significant impact on state and local taxation. The presidential and congressional elections could affect prospects for any further federal assistance to state and local governments and therefore the need to raise state and local taxes to address budget shortfalls stemming from the health crisis and resulting economic downturn. The federal elections also could affect the outlook for federal tax law changes that may result in state conformity issues, as well as affect state taxing authority (e.g., ‘mobile workforce’ and pandemic-related tax rules). State and local tax policy also will be influenced by the outcome of gubernatorial and state legislature elections as well as ballot measures.

Pre-election, Republicans held a 26-24 lead over Democrats in control of state governorships. This will switch slightly with the election of Governor-elect Greg Gianfote (R) in Montana, giving Republicans trifecta control of that state government. 

Republican control of state legislatures appears unlikely to change to the degree it appeared possible before the elections. As of this writing, the state chambers with the greatest potential for switching from Republican to Democratic - Arizona (House and Senate), Michigan (House), and Minnesota (Senate) – appear to be trending toward the status quo. Meanwhile, a change to Republican control appears possible in New Hampshire after taking the Senate, with the House still undecided. The National Conference of State Legislatures is reporting this could be the least amount of change in state legislative chamber control since 1944, when four chambers changed hands - and potentially even fewer changes could result.

Multiple tax measures were also on state and local ballots, including California’s Proposition 15, which would institute a ‘split roll’ for assessment of commercial and industrial property. As of this writing, Proposition 15 is failing by a slim margin, pending final results. Meanwhile, a graduated income tax in Illinois has failed, while a 3.5% high-earner surcharge leads in Arizona. Among other significant ballot measures, San Francisco appears to have enacted the nation’s second ‘CEO pay ratio tax’ - Portland, OR being the first.

The takeaway

Much remains undecided on the federal and state elections and their impact on state and local taxation. At this point, however, it appears that state government control will not significantly shift as a result of the elections, although there is the potential for some shifts in power. Tax-raising ballot measures had mixed results at the polls, although there too results are still coming in.

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Peter Michalowski

State and Local Tax Leader, PwC US

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