With 2017 just around the corner and state policymakers beginning work on next year’s legislation in earnest, it’s worth pausing to review recent trends in state 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. ation to glean hints of what to expect in the year to come. Here are a few trends we’ve been seeing in recent years:
- Reduced Taxation of Capital. States have been slowly but steadily eliminating or reducing reliance on tangible personal 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. es (generally levied on business property like equipment and fixtures) for years. Similarly, most states outside the southeast have repealed their capital stock taxes, with Pennsylvania, Rhode Island, and West Virginia the most recent states to abandon them, while Mississippi, Missouri, and New York pursue multi-year phaseouts. There appears to be an emerging consensus that these taxes impede economic growth and are ill-suited to the modern economy.
- Lower Income Taxes but Higher Sales TaxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es. Eighteen states and the District of Columbia have adopted 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 of tax revenue in the U.S. cuts since 2008, and 15 states and the District of Columbia have reduced corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. es over the same span, but a number of states—including Kansas, Louisiana, and South Dakota over the past 18 months—have raised sales tax rates. While there is no one reason for these divergent trends, upward pressure on sales tax rates due to base erosion (as services, generally untaxed, assume an ever greater share of total transactions) certainly has something to do with it.
- The Erosion of Corporate Income Tax BaseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. s. C Corporations have lost ground to pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. es, corporate revenue is getting more volatile, and tax preferences carve out corporate income tax bases, making state corporate income taxes an ever smaller and more volatile source of state revenue. As a consequence, many states have reduced reliance on corporate income taxes, and some (see below) have looked for alternatives.
- The Return of Gross Receipts TaxA gross receipts tax is a tax applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. es. An antiquated tax once seemingly on the way out, in recent years a number of states have turned to this highly nonneutral tax, chiefly as an alternative to volatile corporate income taxes. Ohio, Texas, and Nevada all adopted gross receipts taxes in recent years, though Oregonians just rejected a ballot initiative to adopt a high-rate gross receipts tax.
- Fewer Estate and Inheritance TaxAn inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate. es. New Jersey, which will fully phase out its estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. by January 2018, is only the latest state to move away from death taxes (though the Garden State will continue to levy an inheritance tax, as one of two states which imposed both). Twelve states and the District of Columbia levy estate taxes, four levy inheritance taxes, and two impose both—all numbers that are in decline. A number of states which have stopped short of repealing such taxes have nonetheless worked to increase the size of their exemptions.
- Growing Utilization of Triggers and Phase-Ins. Eleven states and the District of Columbia have turned to tax triggers to implement contingent tax rate reductions or other reforms in recent years, and still other states have phased in reforms and reductions over multiple years. Revenue triggers may be on track to become the default mechanism by which states implement tax reform.
Of course, if there’s anything we’ve learned from these last few months, it’s that the past is not always prologue—or at least that we weren’t fully understanding that prologue. Nevertheless, anyone considering what to expect in state tax policy in 2017 and beyond could do worse than to contemplate these recent trends.Share