Menu
Tax Notes logo

Tax Trends in State Legislatures

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 taken a look at what's going on in the state legislatures across the country, so now 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 1st 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 actually it turned out pretty OK. They conformed to some of the TCJA selectively and they avoided GILTI. 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: Well, you mentioned the TCJA, and a lot of the discussions since that passed has been on 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 in 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. And California and Illinois, also high-tax states that would be hurt by the $10,000 cap, they were attempting charitable trust workarounds until that was squashed. Again, Wisconsin also, we have taxation at the entity level for PTEs. That was certainly one.

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. D.C. 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. And now, 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, and 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 health care 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, so that was a continuing tax on healthcare providers. 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. Not exactly sales tax brought into services, but it could be considered a tax on services. 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 of those sort of directions 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.

David Stewart: And now, coming attractions. Each week we preview commentary that'll be appearing in the Tax Notes magazines. I'm joined by Executive Editor for Commentary Jasper Smith. Jasper, what will you have for us?

Jasper Smith: Thanks, Dave. In Tax Notes Federal, Elliot Pisem and David Snyder discuss how an entity aggregation rule in the Internal Revenue Code can disqualify your business from meeting the section 163(j) small business exemption. William Snape examines the biological baseline reports required for all conservation easements and recommends that Congress clarify the statutes regarding appraisals. In Tax Notes State, Christopher Lutz launches his column “Internally Consistent” with a discussion of how states and Congress should address challenges presented by Public Law 86-272 and also criticizes state efforts to interpret that law out of existence. Nikki Dobay and Jennifer Young discuss the administrative challenges and potential litigation risks of the newly enacted clean energy surcharge in Portland. And in Tax Notes International, Reuven Avi-Yonah and Kimberly Clausing make a case for the U.S. to adopt a sales-based formulary apportionment solution for all large enterprises, asserting that it would provide a more stable outcome than OECD proposals for taxing a digital economy. And Barry Larking discusses the future of the Netherlands’ group taxation regime and considers how other EU member states have approached the issue.

David Stewart: You can read all that and a lot more in the August 26th editions of Tax Notes Federal, State, and International. That's it for this week. You can follow me online at @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

Tax Analysts Inc. does not provide tax advice or tax preparation services. The information you have seen and heard today represents the views of the presenters, which may not be the same as those of Tax Analysts Inc. It may include information obtained from third parties, and Tax Analysts Inc. makes no warranties or representations of any kind, and is not responsible for any inaccuracies. Nothing in the podcast constitutes legal, accounting, or tax advice. The tax laws change frequently, and neither Tax Analysts Inc. nor the presenters, can guarantee that any information seen or heard is accurate. Also, due to changing tax laws, any information broadcast or downloaded after its original air date may no longer represent the current views of the presenters. If you have any specific questions about any legal or tax matter, you should always consult with your attorney or tax professional. 

All content in this broadcast is protected under U.S. and international laws. Copyright © 2019 Tax Analysts Inc. Unauthorized recording, downloading, copying, retransmitting, or distributing of any part of the podcast is strictly prohibited. All rights reserved.

Copy RID