- October 27, 2020
- Posted by: detaxify
- Category: Tax Law
There are a lot of state ballot measures affecting tax policy this year. Most were introduced before the pandemic, but all of these votes took on increased significance when COVID-19 and the resulting recession hit state tax revenue hard.
For the undecided or unaware, I prepared this guide to the votes on income taxes, sales taxes, property taxes, and all sorts of sin taxes.
Are voters looking for significant state tax changes this year?
Among 2020’s ballot measures, the one with the largest potential impact is on the Illinois ballot. The Allow for Graduated Income Tax Amendment would do just that. Illinois is one of nine states with a flat income tax rate (4.95 percent), and the ballot measure asks voters if they will “allow the state to enact legislation for a graduated income tax.”
But a “yes” vote would do much more because it triggers previously enacted legislation (SB 687). That bill is a bit complex (see here for a good summary), but it creates an income tax with six tax brackets: three brackets with marginal tax rates at or below 4.95 percent on taxable income under $250,000, two with marginal tax rates (7.75 percent and 7.85 percent) on taxable income above that but below $1 million, and a 7.99 percent tax rate on all taxable income if a married filer earns more than $1 million (the threshold is $750,000 if single).
That last tax rate on all income is unique. No state currently levies a top tax rate that applies to all taxable income once you reach a certain level of income.
The legislation also includes a $100 nonrefundable child tax credit and an expansion of existing property tax relief. Overall, the changes are expected to raise $3.4 billion annually. Governor Pritzker made establishing a progressive income tax central to his plan for solving Illinois’s budget problems before the pandemic, and he does not sound optimistic about alternatives if the amendment fails.
Arizona’s Proposition 208 also proposes a large but far simpler income tax hike. If passed, it would raise Arizona’s top marginal income tax rate from 4.5 percent to 8 percent on taxable income greater than $250,000 for single filers and $500,000 for married filers. The tax increase is projected to raise $940 million in its first year (an estimate made prior to the pandemic), with the new revenue dedicated to Arizona’s K-12 education programs. A similar measure was set for the 2018 ballot but got struck down by the courts.
Meanwhile, Colorado is considering both a significant income tax cut and a major new tax. Proposition 116 would cut the state’s flat income tax rate—both individual and corporate—from 4.63 percent to 4.55 percent. In its first full year of implementation, the rate reductions would lower tax revenue by roughly $200 million, according to the state’s estimates. In contrast, Proposition 118 would enact a new 0.9 percent payroll tax (with employee and employer each contributing half) to fund a new paid family and medical leave program. In its first full year, the tax is expected to raise $1.2 billion in revenue.
Arkansas’s Issue 1 would prevent a change to the state’s general sales tax. In 2012, Arkansans voted to increase the state’s general sales tax rate from 6 percent to 6.5 percent, but the higher rate is scheduled to expire in 2023. If passed, Issue 1 would make the 6.5 percent sales tax rate permanent. All of the nearly $300 million in estimated annual revenue from the higher rate is dedicated to Arkansas’s transportation projects, which helps explains why the state’s conservative Republican governor is one of its biggest supporters.
Is 2020 the end of two defining restrictions on local property taxes?
One of the most significant ballot measures of the year is California’s Proposition 15, which would reverse some of Proposition 13’s restrictions on local property taxes. The implications for California are so immense that we wrote an entire blog post on it. But if you’re short on time, I’ll summarize: Proposition 15 is a big tax hike ($6.5 to $11.5 billion in new revenue) on high-value commercial and industrial properties.
In Colorado, Amendment B would repeal part that state’s strict limits on property taxes: the Gallagher Amendment. Among other restrictions, Gallagher requires 55 percent of Colorado’s property tax revenue come from commercial properties and 45 percent from residential properties. The law and its fiscal effects are complicated (the Colorado voter guide is very informative if you really want to dig in) but the result has been consistently lower residential property taxes.
Policymakers put repeal on the ballot this year because they worried how Gallagher will interact with the COVID-19 recession. One lawmaker warned that if Gallagher stays in effect it could cost local governments $500 million in property taxes this year, which would further exacerbate the already daunting revenue crisis at the local level.
If passed, Amendment B would prevent further reductions in property tax revenue but still require voter approval for property tax increases. As such, both Democrats and Republicans in the legislature supported putting the amendment on the ballot.
Is the answer to state budget questions still sin?
Sin taxes are always a popular (if flawed) solution to state budget problems. Thus, it’s not surprising there are quite a few sin taxes on ballots this year.
Voters in Colorado (Proposition EE) and Oregon (Measure 108) will both decide on proposed cigarette tax increases (from $0.84 to $2.64 per pack in Colorado; from $1.33 to $3.33 per pack in Oregon) and levying new taxes on vaping. Both states anticipate the tax hikes would generate hundreds of millions of dollars each year in tax revenue, with Colorado’s new revenue dedicated to education and Oregon’s to health care programs.
Arizona (Proposition 207), Montana (I-190), New Jersey (Public Question 1), and South Dakota (Constitutional Amendment A) are all voting on legalizing and taxing marijuana. As with the 11 states that already tax legal marijuana purchases, the projected revenue is relatively small but still significant, with annual revenue estimates ranging from $38.5 million in Montana to $166 million in Arizona.
And the rest?
A few other ballot measures are also worth following.
Californians (Proposition 22) will decide if drivers of app-based services like Uber are employees or contractors. This is a contentious debate driven in large part by tax policy that we covered in-depth in a previous blog post.
Given the unprecedented nature of the current pandemic and recession, it’s hard to say if any of these ballot measures tell us much about how states will approach taxes over the next few years. But all of these measures are yet another significant decision point in what will prove to be a series of tough decisions during challenging times.