Tax Notes Today State reporters Lauren Loricchio and Aaron Davis recap the biggest tax trends to emerge from state legislatures in 2019 and preview what’s to come.
Read the podcast episode's transcript below. The post has been edited for length and clarity.
David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: checking in with the states. It's been a little while since we've looked at what's going on in the state legislatures across the country. As the fall legislative sessions are about to get started, we're joined by Tax Notes Today State reporters Lauren Loricchio and Aaron Davis to talk about what has been happening over the last few months and what we can expect in the near future. Lauren, Aaron, welcome to the podcast.
Lauren Loricchio: Thanks for having us.
Aaron Davis: Thank you.
David Stewart: Why don't we start with a look back at some of the major state developments in the last year's legislative session?
Lauren Loricchio: I think the biggest trend we saw this year was states passing marketplace facilitator legislation.
Aaron Davis: Absolutely.
Lauren Loricchio: At least 33 had enacted legislation as of July 1 and that's according to a roundup that one of our reporters did here. Massachusetts recently enacted a budget with marketplace facilitator provisions as well. North Carolina's budget includes marketplace facilitator requirements, but the state lawmakers there are locked in a budget standoff right now.
Aaron Davis: So I think out West, one of the most productive states we've seen this session was Illinois. They voted in a constitutional amendment to shift the state from a flat income tax to a graduated income tax. Although that's going to require the voters to approve it, I think that was one of the largest changes that state has seen in many years. They didn't stop there. They continued along with legalizing sports wagering, as well as recreational cannabis, market facilitator laws, and increasing the gas tax. So that was a pretty productive season, especially since the state had seen about a 795-day budget impasse recently. With Wisconsin, we had a pretty contentious session this year. We saw legislators strip power from the incoming governor and strip a majority of the revenue raisers out of his budget and in turn, he then vetoed a few of their items. But they ended up setting a path to a flatter income tax and taking on more debt. Minnesota, though, was the opposite. They were the only state with a split legislature and it turned out pretty OK. They conformed to some of the Tax Cuts and Jobs Act selectively and they avoided taxing global intangible low-taxed income. They got remote seller and marketplace facilitator legislation in California passed and some selective IRC conformity as well. And I think we saw several states attempt to partial conformity to the TCJA.
David Stewart: A lot of the discussions since the TCJA passed has been about the $10,000 state and local tax deduction limit and a lot of states seem to have tried to find ways around that. What have we seen on that this last year?
Lauren Loricchio: Well, last year we saw states like New York and New Jersey enact SALT workarounds to allow local governments to set up funds that taxpayers could make charitable contributions to in exchange for a tax credit, but the IRS released regulations that shut those down. Last year Connecticut enacted the first SALT workaround for the owners of passthrough entities, and Wisconsin also passed a similar law. This year we saw Rhode Island, Louisiana, and Oklahoma enact similar types of workarounds for passthrough entities. And proposals were also introduced in Arkansas and Minnesota, but those didn't pass.
Aaron Davis: I think a majority of the workarounds were spearheaded by the eastern states. California and Illinois, also high-tax states that would be hurt by the $10,000 cap, were attempting charitable trust workarounds until that was squashed.
David Stewart: Now, what's been happening with wealth taxes in the states?
Lauren Loricchio: Taxes came up in several states this year as part of a discussion about how to make the tax system more fair. Connecticut passed a so-called “mansion tax,” or a new marginal conveyance tax rate of 2.25 percent on the value of residential property sales over $2.5 million. The General Assembly considered a surcharge on capital gains, but that proposal was rejected by the governor. And in New York, the budget included a progressive mansion tax on the sale of properties valued at more than $25 million. The governor of New Jersey proposed expanding the tax on multimillionaires to millionaires, but that ultimately failed to pass due to lack of support among Democrats.
Aaron Davis: In terms of the western states, Illinois certainly had more progressive taxation, as we said before, though it was more on income than on wealth. The District of Columbia did pass an increase in their transfer taxes on commercial properties over $2 million. There was a discussion in Minnesota of reducing the estate tax exemption, and more serious discussion of a financial transfer tax in Illinois. Wisconsin floated the idea of ending a capital gains exemption, but it was killed faster than it could come up. One thing I did see in several states, including Minnesota, Illinois, D.C., Ohio, and California was an expansion of the earned income tax credit. There has been a fair amount of discussion at the national level to expand this further, given the widening incoming inequality in the country and potentially making it worthwhile for single individuals so that it becomes almost a bridge to a universal basic income.
David Stewart: Alright, let's turn to the sales tax. Generally sales tax is only applied to goods, but has there been some movement toward taxing services as well this year?
Lauren Loricchio: This year, Connecticut's governor proposed a major sales tax base expansion in his budget. That ended up getting scaled back quite a bit by the legislature. The final budget expanded the sales and use tax to some parking services, dry cleaning and laundry services as well as interior design services. A bill was filed just before the South Carolina legislative session ended that would have expanded the sales tax to a variety of professional and personal services. That proposal didn't pass, but according to the bill sponsor, it's being reviewed this summer and could be revisited again next year. Utah also considered a proposal to expand the sales tax base to a broad group of services. It faced opposition from business groups and was pulled from consideration and replaced with a task force to study tax reform.
Aaron Davis: Minnesota previously had a tax on healthcare providers that helped pay for some of their, I believe it was Medicaid, but the rate was reduced a small amount from 2 percent down to 1.8 percent. They repealed the sunset on it. Most states continue to push for digital streaming services taxes or fight for it in court, particularly Illinois and Chicago. Chicago won its streaming tax case and D.C. started taxing Netflix and Hulu services. Ohio, oddly enough, had a last-minute deal that maintained its reduced rate business income deduction, but it prevented lawyers and lobbyists from claiming the deduction, which was an interesting sort of compromise at the end. Kentucky expanded sales tax to a wide range of services last year, though business owners being taxed noted that automotive labor, dry cleaning, and veterinarians were taxed while accountants, lawyers, and doctors were not.
David Stewart: Now, looking ahead into the next year, what sort of trends are we expecting to see?
Aaron Davis: Well, I can see states finalizing marketplace facilitator rules and with that out of the way, it appears that they may either work towards broadening the sales tax base, which is actually a policy recommended by the Tax Foundation, or expanding the EITC amount and base, which is a policy recommended by Institute on Taxation and Economic Policy. I think that both these trends were also mentioned at the National Conference of State Legislatures summit recently in Nashville. And I think that states are sort of looking in both directions.
Lauren Loricchio: I think we can definitely expect to see more on marketplace facilitator laws, maybe some states passing changes to what they've already done this year. And then I think we'll see more proposals to expand the sales tax to services, although it's kind of a difficult thing for a state to get accomplished.
David Stewart: Alright, I guess we'll have to check back in after we see how this legislative session goes. Lauren, Aaron, thank you for being here.
Aaron Davis: Thank you.
Lauren Loricchio: Thanks for having us.
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