The June solstice has passed, marking the official beginning of summer and the end of most state legislative sessions. During this season, many states are beginning to implement policy changes that were enacted during this year’s legislative session (or that are being phased in over time).
The majority of state individual and 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. policy changes take effect on January 1, the beginning of the calendar year, to maintain consistency throughout the 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. year. However, many sales and excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. changes take effect on July 1, which is the beginning of the fiscal year for all states except Alabama, Michigan, New York, and Texas.
On July 1, 2023, at least 32 notable tax policy changes will take effect across 18 states, including 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. rate reductions in New Mexico and South Dakota, a repeal of the corporate franchise (capital stock) tax in Oklahoma, the implementation of a payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. in Washington, and the implementation of taxes on newly legalized sales of cannabis products in Maryland and Minnesota.
Separately, across 11 states, at least 22 notable tax policy changes have been enacted or phased in this year and are retroactively effective as of January 1, 2023, including income tax reductions in Arkansas, Michigan, North Dakota, Utah, and West Virginia. Further, a few states had notable tax policy changes take effect after January 1, 2023, but before July 1, 2023.
We have provided an overview of these tax policy changes below. This is not an exhaustive list, as it does not capture changes to certain credits, exemptions, definitions, administrative procedures, calculations, or provisions that are relatively minor or only affect a small share of taxpayers. Rather, this report focuses on major structural changes, including rate changes, the implementation of new taxes, and notable changes in the 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 of major statewide taxes.
Income Tax Changes
Senate Bill 417, which was enacted in May and takes effect July 1, allows Indiana counties to adopt local income taxes to pay for county staff expenses related to the state’s judicial system. Notably, any such tax rate must be levied in increments of one-hundredth of one percent (0.01 percent), not exceeding two-tenths of one percent (0.20 percent), and it may be in effect for no more than 25 years.
Payroll Tax Changes
In Washington, a 0.58 percent payroll tax to fund a mandatory long-term care insurance program will take effect July 1, 2023, following litigation that resulted in various legislative changes and delays. The tax and the underlying program are the results of a law that was initially enacted in 2019.
Sales and Use Tax Changes
Illinois’ one-year sales tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax. for groceries, which was enacted in 2022 as part of the Family Relief Plan, is set to expire at the end of the second quarter, with no extension in place. Starting July 1, Illinois will again collect a sales tax on groceries at a preferential rate of 1 percent, well below the statewide general sales tax rate of 6.25 percent.
Starting July 1, Indiana will significantly expand its sales tax exemption for nonprofit organizations selling tangible personal property. Under current law, nonprofit organizations are not required to collect sales taxes if they make $20,000 or less in sales in a year. Under S.B. 417, enacted in May 2023, nonprofit organizations making $100,000 or less in sales will not be required to collect sales taxes on otherwise taxable sales.
On July 1, New Mexico will phase in another reduction to its sales tax, known in New Mexico as the 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. (GRT), bringing the rate from 5 to 4.875 percent. This change is the result of a law enacted in 2022 to reduce the rate from 5.125 to 4.875 percent over two years. A provision to reduce the rate even further—to 4.5 percent this July and 4.375 percent next July—was included in an omnibus tax bill that was sent to the governor, but that proposed rate reduction was among the provisions receiving line-item vetoes. She did, however, approve an expansion of the GRT deduction for medical services, which takes effect July 1.
House Bill 1137, enacted in March, reduces South Dakota’s statewide sales tax rate from 4.5 to 4.2 percent. This rate reduction is effective for four years beginning July 1, 2023, and expiring after June 30, 2027.
Separately, Senate Bill 30, enacted in February, amends South Dakota’s sales tax economic nexus statute for remote sellers, removing the 200 transactions threshold, a noteworthy simplification of the design of the 2016-enacted law that the U.S. Supreme Court evaluated in its 2018 South Dakota v. WayfairSouth Dakota v. Wayfair was a 2018 U.S. Supreme Court decision eliminating the requirement that a seller have physical presence in the taxing state to be able to collect and remit sales taxes to that state. It expanded states’ abilities to collect sales taxes from e-commerce and other remote transactions. decision. Effective July 1, only remote sellers with more than $100,000 in gross sales in South Dakota will be required to register with the state and collect and remit South Dakota’s sales taxes. In the months immediately following the Wayfair decision, many states initially modeled their economic nexus laws after South Dakota’s. More recently, however, many states have removed their transaction thresholds in an effort to simplify their laws and reduce compliance burdens for those remote sellers with many transactions but a relatively small total amount of gross sales in their state.
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. Changes
Effective July 1, 2023, under S.B. 46, enacted in May, Indiana counties may provide a county option circuit breaker tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. against qualifying individuals’ property tax liability.
Capital Stock Tax Changes
Oklahoma was among the states enacting structurally sound business tax reforms this year with the adoption of H.B. 1039 in May. This new law repeals the state’s corporate franchise (capital stock) tax, effective July 1, 2023. Currently, the tax is levied at a rate of 0.125 percent, with a maximum payment of $20,000.
Tobacco, Vapor, and Cannabis Tax Changes
On July 1, California will adjust the tax rate imposed on the wholesale cost of other tobacco products (OTP), including vapor products, changing it from 61.74 to 56.32 percent of the wholesale cost. Each year, California’s Department of Tax and Fee Administration is required to adjust the rate on OTP to bring it into parity with the effective rate on cigarettes. Since 2017, California’s cigarette tax rate has been $2.87 per pack of 20. An increase in the average retail price of cigarettes has thus caused the effective rate of the $2.87 per pack cigarette tax to decline, triggering the automatic reduction in taxes on OTP.
On July 1, Idaho will implement a new tax cap of $0.50 per cigar as a result of H0330, enacted in April. Currently, cigars are taxed at a combined 40 percent of the wholesale sales price, with two separate taxes of 35 percent and 5 percent imposed. Moving forward, the cap will limit the taxes that would otherwise be collected on cigars that have a wholesale sales price exceeding roughly $1.25 per cigar.
Among the tax changes included in Indiana’s biennial budget enacted in May is a provision increasing the stamp discount for cigarette distributors from $0.013 to $0.02 per cigarette, which will reduce cigarette tax revenue slightly. Another provision increases the percentage of cigarette and tobacco tax revenue dedicated to the general fund.
With the passage of H.B. 556 in May 2023, Maryland has joined 22 other states in enacting legislation to legalize the recreational use of marijuana. When legal retail sales begin on July 1, an excise tax will be levied on the retail price at a rate of 9 percent.
Minnesota is among the states to have legalized recreational marijuana this year, with H.F. 100 enacted in May. Beginning July 1, sellers of cannabis products will be required to register with the state and begin collecting the new cannabis tax, which will be levied at a rate of 10 percent on the retail sales price.
As a result of SB 0378, enacted in May, the state of Tennessee will implement a new 6 percent tax on retail sales of hemp-derived cannabinoids, including THC and CBD. The tax will be levied in addition to the 7 percent statewide general sales tax rate and any applicable local option sales taxes.
Sports Betting Tax Changes
Effective July 1, Tennessee will impose a new privilege tax on sportsbook operators of 1.85 percent of the total amount of gross wagers. This change is the result of SB 0475, which was enacted in May. Sports betting became legal in 2019 when the state passed the Sports Gaming Act.
Transportation Tax Changes
The California Department of Tax and Fee Administration issued Special Notice L-901, which established that as of July 1, the Oil Spill Prevention and Administration (OSPA) fee, which is levied on owners of crude oil, petroleum products, and renewable fuels, will increase from $0.085 to $0.091 per barrel. The Department of Tax and Fee Administration has also announced that starting July 1, 2023, the OSPA fee will increase annually at the rate of inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. according to the California Consumer Price Index.
As a result of SB21-260, enacted in 2021, Colorado is phasing in a “road usage fee” on gasoline and diesel fuel. On July 1, the fee on gasoline is set to increase from $0.02 to $0.03 per gallon, and the fee on diesel will increase from $0.04 to $0.06 per gallon. Similarly, the “bridge and tunnel impact fee” paid by special fuel distributors will increase from $0.02 to $0.03 per gallon. These so-called fees are levied in addition to the gasoline excise tax of $0.22 per gallon.
An inflation adjustment to Illinois’ motor fuel tax will take effect July 1, 2023, through December 31, 2023. Gasoline will be taxed at a rate of $0.454 per gallon, up from $0.423 per gallon, while diesel will be taxed at a rate of $0.529 per gallon, up from $0.498 per gallon.
Indiana has published inflation-adjusted fuel tax rates for the fiscal year that begins July 1. The gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. will increase from $0.33 to $0.34 per gallon, and the special fuel license tax will increase from $0.55 to $0.57 per gallon. Additionally, the biennial budget, enacted in May, diverts gasoline use tax revenue from the general fund to the state highway fund.
On July 1, Kentucky’s tax on gasoline will increase from $0.266 to $0.287 per gallon, petroleum from $0.266 to $0.287 per gallon, and special fuels from $0.236 to $0.257 per gallon, in accordance with changes in the average wholesale price (AWP) of gas. Kentucky’s excise tax is levied at a rate of 9 percent of the AWP before an additional surcharge is imposed. Notably, Kentucky law limits the extent to which the AWP can increase or decrease to 10 percent in either direction in a given year for gas tax calculation purposes.
Maryland’s fuel taxes will increase on July 1, 2023. The state’s gas tax will rise to $0.47 per gallon, and the diesel tax will climb to $0.4775 per gallon. In accordance with a 2013 law, Maryland directs the state’s comptroller to determine the average fuel price and set the tax rates based on that price. Generally, the average price is based on data compiled by the Oil Price Information Service and on prices for regular unleaded motor fuel reported during the 12-month period ending on the last day of the second immediately preceding month. The fuel tax rate is currently 3 percent of that determined average fuel price.
On July 1, Missouri’s gas tax will increase from $0.22 to $0.245 per gallon, following a schedule of increases implemented by legislation enacted in 2021 that set out to raise the tax by $0.125 per gallon by July 1, 2025.
Effective July 1, 2023, H.B. 55, which was enacted in May, creates a tax of $0.03 per kilowatt hour or its equivalent on electric current from public electric vehicle charging stations. Public charging stations already in operation have until July 1, 2025, to install meters to collect the tax. To relieve the tax burden on in-state electric vehicle owners, H.B. 55 reduces electric vehicle registration fees by 30 percent starting in 2028.
House Bill 301, enacted in March, reduces Utah’s gas tax rate from $0.364 to $0.345 per gallon while imposing a new tax at a rate of 12.5 percent on retail sales of electric current from electric vehicle charging stations.
Virginia’s fuel taxes will increase on July 1, including the gas tax, which will increase from $0.28 to $0.298 per gallon, and the diesel tax, which will increase from $0.289 to $0.308 per gallon, as well as taxes on blended fuels.
Miscellaneous Tax Changes
As part of the road usage fee legislation going into effect July 1, Colorado will also implement a $0.27 “fee” on deliveries and a $0.30 fee on rideshares.
Notable State Tax Changes with Retroactive Effective Dates of January 1, 2023
Below are notable state tax policy changes that were enacted during states’ 2023 legislative sessions and implemented retroactively with effective dates of January 1, 2023.
Building upon a series of reforms adopted in recent years, S.B. 549 was enacted on April 10, reducing individual and corporate income tax rates, retroactive to January 1, 2023. In 2022, Arkansas’s top marginal 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. rate was reduced from 5.5 to 4.9 percent, retroactive to January 1, 2022, and the top marginal corporate income tax rate was reduced from 5.9 to 5.3 percent, effective January 1, 2023. The cuts enacted this year will reduce these rates even further, bringing the top marginal individual income tax rate to 4.7 percent and the top marginal corporate rate to 5.1 percent, effective for tax year 2023 and on.
In May, Indiana Gov. Eric Holcomb (R) signed into law H.B. 1001, the state’s biennial budget bill for fiscal years 2024 and 2025. The most notable tax change included in the budget is a provision to accelerate previously enacted individual income tax rate reductions, starting with tax year 2024. Additionally, effective retroactively to January 1, 2023, the dependent exemption is doubled in the first year in which such exemption is allowed, such as for infants and newly adopted children, and the Earned Income Tax Credit (EITC)The Earned Income Tax Credit (EITC) is a refundable tax credit targeted at low-income working families. The credit offsets tax liability, the total amount of tax debt owed by an individual, corporation, or other entity to a taxing authority like the Internal Revenue Service (IRS), and can even generate a refund, with earned income credit amounts calculated on the basis of income and number of children. is recoupled with the federal credit.
Michigan’s flat individual income tax rate has been reduced from 4.25 to 4.05 percent for 2023, the automatic result of a 2015 law that prescribed tax rate reductions for any year, beginning in 2023, in which general fund revenue growth exceeds the rate of inflation growth. In March 2023, Attorney General Dana Nessel issued a legal opinion stipulating that the rate will revert back to 4.25 percent for 2024 and beyond. This opinion has sparked debate among legislators and stakeholders as to the intent and letter of the 2025 law, which could lead to litigation.
On May 21, 2023, Minnesota’s Gov. Tim Walz (DFL) signed into law an extensive omnibus bill that includes many tax increases on businesses and many narrowly targeted tax reductions for certain individuals. Effective for tax year 2023, the law expands Minnesota’s taxation of global intangible low-taxed income (GILTI)Global Intangible Low-Taxed Income (GILTI) is a special way to calculate a U.S. multinational company’s foreign earnings to ensure it pays a minimum level of tax. GILTI was adopted as part of the 2017 Tax Cuts and Jobs Act (TCJA) and can lead to high tax burdens on foreign profits, putting U.S. companies that operate abroad at a disadvantage. to 50 percent, further limits the net operating loss (NOL) deduction, increases numerous tax credits, and expands the income tax exemption for Social Security benefits, among other changes.
This legislative session, Mississippi lawmakers built upon recently enacted rate reductions by adopting important structural changes. House Bill 1733, enacted on March 27, substantially improves the income tax treatment of business investments in machinery and equipment by allowing permanent full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. of these investments in the year such expenses are incurred. Separately, H.B. 1733 codifies Mississippi’s practice of allowing first-year expensing, up to certain limits, for § 179 property. Previously, Mississippi’s administrative code contained a § 179 expensing provision, but this law will ensure those protections are solidified in the underlying statute. These changes are retroactive to January 1, 2023.
In May, LB754 and LB243 were enacted in Nebraska, making numerous tax changes with various effective dates. For tax year 2023, LB243 increases the state credit for community college property taxes paid to $100 million. Starting in 2024, the credit will offset 100 percent of community college property taxes paid.
The legislature in New Mexico passed H.B. 547, an omnibus tax bill, and on April 7, Gov. Michelle Lujan Grisham (D) allowed some provisions to become law but vetoed others. Among the tax changes signed into law is an increase to the Child Tax Credit effective retroactively to January 1, 2023.
After legislators considered several different proposals to reduce individual income tax rates, on April 28, Gov. Doug Burgum (R) signed into law H.B. 1158, a bill that contains several tax changes, the most notable of which is a reduction in North Dakota’s individual income tax rates. Specifically, H.B. 1158 converts the existing five-bracket individual income tax structure with a top rate of 2.9 percent into a more consolidated rate schedule with a top rate of 2.5 percent, a lower intermediate rate of 1.95 percent, and a sizeable zero bracket. These changes are retroactive to January 1, 2023.
On May 11, Tennessee’s Gov. Bill Lee (R) signed H.B. 323, a bill that includes several structural tax improvements. Specifically, effective January 1, 2023, the law conforms Tennessee to IRC § 168(k), which offers bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings, in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. for firms making qualified machinery and equipment investments. From 2018 to 2022, the provision allowed 100 percent bonus depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. , known as full expensing, but as of this year, the provision is phasing down by 20 percent per year until it sunsets in 2027.
For purposes of the excise (corporate income) tax and the franchise (capital stock) tax, the new law shifts to single sales factor apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. , moving away from a three-factor formula with a triple-weighted sales factor. The transition to single sales factor will be fully effective in 2025, but tax year 2023 is the first year of the three-year phase-in.
In March, H.B. 54 was enacted, making several changes across various parts of Utah’s tax code. Several of the tax changes included in the law (such as the proposed state sales tax exemption for groceries) would take effect in January 2025 but are contingent upon the outcome of a legislatively referred constitutional amendment set for the November 2024 ballot. Among the provisions that are retroactive to January 1, 2023, however, are a reduction in Utah’s individual and corporate income tax rates from 5.85 to 4.65 percent, an additional dependent exemption for taxpayers in the year of that dependent’s birth, a provision that expands eligibility for the Social Security income tax credit, and an EITC increase.
West Virginia joined a growing number of states in reducing its individual income tax rates with the enactment of H.B. 2526 in March. These changes, which include a reduction in the top marginal rate from 6.5 to 5.12 percent and an across-the-board reduction in the lower rates,
are retroactively effective as of January 1, 2023, and occur alongside other substantial tax reforms made by the state.
Notable State Tax Changes with Other Effective Dates
Occasionally, tax policies take effect upon enactment, or on dates other than January or July 1. In addition to the legislation taking effect July 1, or which took effect January 1 or retroactive to January 1, two pieces of tax legislation that took effect in April are worth noting.
House Bill 2, enacted in April 2023, legalized recreational marijuana in Delaware as of April 23, 2023. However, legal sales will not begin until late 2024 or 2025. When legal sales begin, a 15 percent excise tax will be levied on the retail price of cannabis products.
Another tax change included in H.B. 547, New Mexico’s omnibus tax bill, is a one-time income tax rebate of $500 for single filers and $1,000 for married couples filing jointly. This provision took effect April 1, 2023.Share