State Tax Trends to Watch in 2026

State lawmakers around the country have begun their legislative sessions, and many are considering taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform. This piece highlights some of the areas on which they are likely to focus.

What gets the most attention in California and New York may be different than what occupies legislative calendars in Florida, Georgia, and South Carolina. Nevertheless, these are important trends to consider and monitor, particularly as states navigate revenue challenges and competitiveness. Even in states like Montana and Texas, which are not in session this year, lawmakers are actively considering 2027 legislative initiatives, and those conversations could be shaped by what happens in statehouses in 2026.

State Impacts of the One Big Beautiful Bill Act

The 2025 passage of the One Big Beautiful Bill Act (OBBBA) ushered in important opportunities and questions for states, particularly those navigating or anticipating fiscal challenges. The OBBBA’s implications are prominent in tax discussions this year, and many states are deciding whether to conform to or decouple from particular parts of the sweeping federal legislation.  

Some provisions, like no taxes on tip or overtime income, are politically popular but costly, to say nothing of the disparate impacts on taxpayers with similar take-home pay but different mechanisms of earning that income. Other provisions, like Internal Revenue Code (IRC) section 174, research and experimentation (R&E) cost recoveryCost recovery refers to how the tax system permits businesses to recover the cost of investments through depreciation or amortization. Depreciation and amortization deductions affect taxable income, effective tax rates, and investment decisions., are getting renewed attention. Despite being a feature of federal and state tax law since 1954, states are actively considering whether to continue to allow for immediate expensing of R&E or to disallow the deduction. Revenue worries have lawmakers second-guessing expensing, but these concerns are shortsighted. While immediate expensing of certain costs would cause a revenue impact, it would be short-lived, while states would accrue the advantages of increased state-level investments for years to come.

Individual Income TaxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source Rate Reductions

In recent years, states have pursued individual income tax rate reductions and flatter, less progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. structures. Since 2021, 26 states cut individual income tax rates (including 23 reductions to top marginal rates) and eight states enacted legislation to transition to a flat individual income tax structure. Other states have taken note of these competitive changes and are actively considering income tax reform. Specifically, lawmakers in Missouri, Oklahoma, and South Carolina have considered moving to a single-rate system. Often, these changes take years to come to fruition, and lawmakers would do well to ensure that any reform is fiscally responsible. However, to the extent that such reforms are feasible, individual income tax reductions are pro-growth tax policy.

Property TaxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. Elimination and Reform

In recent years, property valuations have surged, and taxpayers are clamoring for relief.  Any property tax reform, however, should ensure that the burden is not merely shifted from residential homeowners to other classes of property (which could negatively impact renters). Unfortunately, in the rush to provide relief, many are considering unsound patches, while others are considering nixing the tax entirely.  

At least 11 states have expressed some interest in eliminating the property tax, particularly for residential property owners. Nationwide, the property tax provides over 70 percent of funding for local government. Eliminating the property tax could significantly impact the local services that taxpayers rely on each day, and there are no good options to replace the lost revenue.

Wealth and High-Earner Taxes

Some states are looking to implement taxes on high earners and high-net-worth individuals. Proponents of the California Billionaire Wealth TaxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary. ballot initiative seek to levy a one-time, five percent tax on individuals with a net worth of $1 billion or more. Beyond the flaws in the proposal that would yield a far higher tax than anticipated, California’s economy could see significant outmigration of high-net-worth individuals and capital alike.

Some in Washington State are proposing a specific tax on individuals earning more than $1 million in a single year. Importantly, this proposal does not seek to tax net worth, which would prevent taxpayers earning less than the threshold from being subject to the wealth tax because of home values. Still, Washington could face similar losses of high-earning individuals and businesses.  

Most states do not have yearlong legislative sessions, requiring lawmakers to consider numerous bills, on a multitude of topics, in a condensed time frame. Often, this leaves little time for debate on tax legislation that can affect a state’s economic standing and competitiveness for years. Therefore, ensuring that any tax reform is fiscally responsible and accords with the principles of sound tax policy—simplicity, transparency, neutrality, and stability—should be top-line priorities.