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State tax policy changes on the horizon, but is 2021 the year?

Peter Michalowski National SALT Practice Leader, PwC US 01 March, 2021

Revenue conditions continue to drive the state tax policy debate. One estimate places the overall state revenue decline at 1.8% due to the impact of COVID — much less than earlier predictions.  However, this does not reflect the uneven revenue situation among the states and in different sectors (see, for example, a recent revenue collection report in Texas).

A key driver of the improved overall state fiscal condition in some states is strong income tax receipts driven in part by market performance and business profits in certain sectors. Another factor is continued federal assistance, both in direct aid to the states and unemployment compensation, which buttresses income and spending.

State tax policy changes on the horizon, but is 2021 the year?

The COVID aid package currently under consideration in the federal budget reconciliation process would provide $350 billion in direct aid to state and local governments. This has prompted some to call for a scaled-back tax proposals, while others continue to push for revenue-raising measures. These revenue-raising proposals are often targeted at sectors and individuals that are seen as having profited during the pandemic.

State budget proposals reveal potential 2021 tax policy directions

Perhaps because of the improving revenue outlook and the prospect of additional federal aid, budget tax proposals appear less ambitious in states that earlier had projected massive revenue shortfalls.

In California, for example, Governor Gavin Newsom’s budget does not include major tax increases, and his senior advisor stated that the Governor would not approve corporate or personal income tax increases this year. The state’s reliance on personal income taxes has helped its rebound, as revenues for the current fiscal year are almost $14 billion ahead of budget estimates according to the Legislative Analyst’s Office. 

This has not muted calls for tax increases, however. For example, proposed California A.B. 71 would increase individual and corporate tax rates and adopt other tax increases, including a mandatory inclusion percentage for GILTI and deemed repatriation inclusion for water’s-edge filing corporate taxpayers. If the measure does not pass, proponents have indicated they may seek placement of these policies on the ballot (in 2022).

In New York, Governor Andrew Cuomo’s proposed budget includes a temporary high-income surcharge with a prepayment mechanism that allows deductions in future years. This and other tax proposals in the budget have not muted calls for permanent rate increases, including individual and corporate tax rate increases, capital gains taxes, wealth taxes, and stock transfer taxes.

There certainly are variations among the state governors’ budgeting approaches, however, with some even proposing major tax cuts, such as Mississippi Governor Tate Reeves’ call for the elimination of the individual income tax. On the other side of the coin, some have called for major tax increases, such as in Illinois, where Governor J.B. Pritzker has pulled back from advocating tax rate increases and instead is advocating the elimination of $900 million in “corporate loopholes.”

Other trends gaining momentum early this year

Notwithstanding the variations among budgetary tax policies advanced early this year, one theme that seems to be resounding in state legislatures is the need to help people and the economy recover from the impact of the COVID pandemic. On the tax front, this can take many shapes, including sales and use tax exemptions for personal protective equipment and excluding from income benefits received under the Paycheck Protection Program.

States are taking a renewed interest in credits and incentives to help the economy “sunrise” out of the COVID downturn. An increasing number of states have adopted or are considering significant enhancements to their credit and incentive programs, such as in CaliforniaGeorgia, and New Jersey

States are also looking at ways to blunt the impact of federal policies on state revenues while seeking ways to benefit taxpayers. This includes federal income tax conformity decisions which can often result in state tax increases (but see Alabama’s recent sweeping tax law that includes retroactive GILTI decoupling). It also includes an increasing number of states considering passthrough entity taxes to allow businesses to deduct these taxes at the federal level, notwithstanding the limitations enacted under the TCJA.

As expected, consumption taxes continue to be a focus for state policymakers. Maryland enacted a first-in-the-nation tax on gross revenue from digital advertising, potentially heralding a push to impose taxes on digital advertising and digital goods and services more generally. On the same day as overriding Governor Larry Hogan’s veto of the digital advertising tax, the General Assembly also overrode a veto of a broad sales and use tax imposition on digital products and codes. Both laws take effect March 14.

Staying ahead of SALT trends

The 2021 legislative sessions are proving to be active and consequential for taxpayers. Investments in monitoring, analysis, and modeling will enable businesses and individuals to make informed decisions and stay ahead of the latest SALT trends. As we have noted, the pandemic has led corporate America to consider revisiting location decisions. Join our 3/3  webcast or listen to the replay for a deeper dive into key state and local tax implications of a remote workforce.

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Peter Michalowski

Peter Michalowski

National SALT Practice Leader, PwC US