Trends in State Tax Policy
December 5, 2016
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 taxation 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 taxes (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 Similarly, most states outside the southeast have repealed their capital stock taxes, with Pennsylvania, Rhode Island, and West Virginia the most recent states to abandon them, while Mississippi, Missouri, and New York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 Taxes. Eighteen states and the District of Columbia have adopted individual income tax cuts since 2008, and 15 states and the District of Columbia have reduced corporate income taxes 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 Bases. C Corporations have lost ground to pass-through businesses, 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 Taxes. 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 Taxes. New Jersey, which will fully phase out its estate tax 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.