Key Takeaways
- Freedom Caucus leader boosts SALT deduction cap increase.
- IRS cuts shift audit burden to state.
- State conformity and extending the Trump tax cuts.
- All-in tax burden map.
- Iowa deferred comp exemption advances.
- Idaho governor signs tax cut bill.
- Business input taxes.
- 50 years of earned income tax credits.
Welcome to this edition of our roundup of state tax developments. Consider the Eide Bailly State & Local Tax team for your state tax planning, compliance, and incentive needs.
SALT Increase Gets Boost From House Freedom Caucus Leader - Eric Wasson, Bloomberg via MSN:
“We will do something on it, there is no question about it,” Maryland Representative Andy Harris said on the Fox Business network.
Harris said Congress will surely double the deduction for joint filers to $20,000, eliminating the current so-called marriage penalty because the deduction is capped at $10,000 whether it’s a single taxpayer or a couple. He added that lawmakers should index it to increase with inflation, aligning it with other major tax provisions that automatically adjust over time as prices rise.
IRS Cuts and State Tax Administration
Cutting IRS Staff May Shift Audit Burden To States, Pros Say - Maria Koklanaris, Law360 Tax Authority ($):
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Panelists also wondered, however, if state tax auditors might now increasingly be coming from the federal workforce. The IRS is poised to shed thousands of employees, and many state tax departments remain understaffed.
"Kansas and some other states I'm familiar with have had a hard time finding and retaining auditors," said S. Lucky DeFries, tax partner at Morris Laing Law Firm. "It will be interesting to see if there are a lot of out-of-work IRS auditors, whether some states that have historically had a hard time finding them, will now have a much bigger pool" of talent to choose from, DeFries said.
TCJA Extension and State Conformity
TCJA Changes Will Lead to State Conformity Issues, Panelists Warn - Christopher Jardine, Tax Notes ($):
“Now that we have so many wholesale federal changes, the static conformity states are being more thoughtful about how they’re going to conform to the federal changes . . . I think every state is really a selective conformity state,” Quinn said.
Digital Ad Taxes: All Eyes on Maryland
Digital Ad Tax Bills Filed As States Watch Maryland, Pros Say - Maria Koklanaris, Law360 Tax Authority ($). "The states are looking for ways to raise revenue and expand their sales tax bases as many move away from taxing income by either lowering their income tax rate or phasing out income tax altogether, the tax professionals said. Only Maryland has actually gone through with enforcing a digital advertising tax, and that tax continues to face litigation. But states are making moves to be ready to emulate Maryland should the tax be found constitutional, they said. The tax professionals spoke at a tax conference in New Orleans, hosted by the American Bar Association's tax section and the Institute for Professionals in Taxation."
All-in Tax Burden
States with the Highest & Lowest Tax Rates - John Kiernan, WalletHub. "Surprisingly, though, low income taxes don’t always mean low taxes as a whole. For example, while the state of Washington’s citizens don’t pay income tax, they still end up spending nearly 9% of their annual income on sales and excise taxes. Texas residents also don’t pay income tax, but spend 1.58% of their income on real estate taxes, one of the highest rates in the country. Compare these to California, where residents owe almost 6% of their income in sales and excise taxes, and just 0.71% in real estate tax."
State-By-State Roundup
Arkansas
Arkansas Governor Announces Bill to End Grocery Tax - Matthew Pertz, Tax Notes ($). "Of the states that still tax groceries, Arkansas’s levy is one of the lowest at 0.125 percent, while the state's sales tax rate on other products is 6.5 percent."
Iowa
Deferred Compensation Tax Exemption Clears Subcommittee
An Iowa House Ways and Means Subcommittee has advanced a bill (HF 94) that would exclude non-qualified deferred compensation from Iowa Tax. Iowa currently excludes qualified plan income from tax for taxpayers 55 or older. From the bill explanation:
A nonqualified deferred compensation plan is deferred compensation with no federal legal deferral limit that is subject to tax at a later date, and is usually made available to select employees.
The bill applies retroactively to January 1, 2025, for tax years beginning on or after that date.
Idaho
Idaho Governor Signs Tax Cut Bill to Cost State $253 Million - Danielle Muoio Dunn, Bloomberg ($). "The legislation, H.B. 40, reduces the individual and corporate income tax rate to 5.3%, from 5.695%. It also removes capital gains and losses from the calculation of state income taxes for precious metal bullion and expands income tax exemptions for military pensions."
Illinois
Illinois Court Upholds Dismissal of Local Gaming Tax Challenge - Andrea Muse, Tax Notes:
In its March 4 ruling in Illinois Gaming Machine Operators Association v. City of Waukegan, the Illinois Appellate Court, Second District, agreed with a lower court that although the Illinois Gaming Machine Operators Association and seven licensed VGT operators have standing to challenge Waukegan’s push tax, the tax should be upheld.
Interesting to say a tax on slots is an "occupation tax."
Kansas
Kan. House Approves Limits On Property Tax - Jaqueline McCool, Law360 Tax Authority ($). "H.C.R. 5011, which the House passed 117-4 and which now goes to the Senate, would create a constitutional amendment that requires residential properties be valued at whichever is lesser, the fair market value of the property or the average fair market value. H.B. 2396, which passed the House 115-6 and now goes to the Senate, would limit how much of a jurisdiction's budget can be funded by property taxes in the case of a successful protest petition."
Maryland
Maryland businesses warn service tax will drive companies out of state - Katie Shepherd, Washington Post. "The business-to-business tax was introduced in two identical bills in the Maryland Senate and House of Delegates last week. Officials at the Department of Legislative Services estimate the tax would raise about $833.6 million in fiscal 2025 and $1.2 billion in fiscal 2026."
New B2B and Digital Taxes Are on the Table in Maryland - Andrey Yushkov, Tax Policy Blog. "Taxing B2B services or business inputs, as we pointed out in our recent guide for policymakers, violates the principles of neutrality and transparency. It leads to tax pyramiding (where effective sales tax rates exceed statutory rates), disguises the true cost of government for taxpayers, shifts the sales tax closer to a tax on production (akin to gross receipts taxes, which often have lower statutory rates), distorts economic decisions regarding capital investment and production processes, and disadvantages smaller in-state firms with fewer opportunities for vertical integration compared to their out-of-state competitors."
Massachusetts
Tax Pros See Constitutional Flaws With Investee Apportionment - Andrea Muse, Tax Notes ($):
...
In VAS Holdings & Investments LLC v. Commissioner, the supreme judicial court held that the state did not have the statutory authority to tax a nonresident S corporation’s capital gains from the sale of its ownership interest in an in-state limited liability company using the investee apportionment method.
Minnesota
Minnesota Legislation Would Ease Burdens for Business Travelers - Abir Mandal, Tax Policy Blog. "At present, nonresidents must file if their gross income from their employer is greater than or equal to the state’s minimum income, which as of 2024 is $14,575. Further, uniquely, Minnesota’s withholding threshold is likewise based not on the amount of state-sourced income a nonresident earns but on the amount of total income earned from an employer, irrespective of the location in which that income is earned. Thus, if an employer anticipates paying more than $14,575 to an employee for work performed anywhere, it must withhold from that employee on any taxable income earned in Minnesota. As such, Minnesota’s filing and withholding thresholds are essentially irrelevant for full-time employees."
New York
New York Lawmakers Propose Income Tax Hikes in Budget Plans - Emily Hollingsworth, Tax Notes ($):
However, the Assembly's plan would set a new, temporary top income tax rate of 12 percent on income over $100 million. The current top rate of 10.9 percent for income over $25 million but less than $100 million would increase to 11.75 percent under the plan. For income between $5 million and $10 million, the rate would be 10.3 percent rate, and income between $10 million and $25 million would be taxed at 10.75 percent. The new rates would take effect for tax years 2025 through 2032.
NY Budget Plan Boosts Film Tax Credits to $800 Million - Danielle Muoio Dunn, Bloomberg ($). "Both chambers also backed a two-year extension of the existing $700 million program for other film production and post-production activities, allowing it to last through 2036. The credit for independent films would also expire that year."
Oklahoma
Pro-Growth Tax Reform for Oklahoma, 2025 - Jared Walczak, Manish Bhatt, and Joseph Johns, Tax Foundation. "While throwback rules were created to avoid the perceived under-taxation of corporate income, they can lead to double taxation and frequently impose tax burdens high enough to make the state unattractive for businesses."
Utah
Utah Bill Cracks Down on Drivers Using Sales Tax Loophole - Michael Bologna, Bloomberg ($):
...
- For more than 25 years, owners of cars, boats, recreational vehicles, and motorcycles across the country have used Montana LLCs to shelter their assets from tax authorities in their home states.
- The enforcement sweep is expected to collect between $50 million and $100 million in unpaid taxes, interest and fees, bill sponsor Sen. Brady Brammer (R) told Bloomberg Tax.
It's more "evasion" than loophole.
Wisconsin
Wis. Senate Prez Rejects Gov.'s Proposed High-Earner Tax - Michael Nunes, Law360 Tax Authority ($). "The governor's budget proposal would create a 9.8% tax bracket on income above $1 million for single filers and is estimated to bring in more than $1 billion over the next two years. Currently, the state's top marginal tax rate is 7.65% on income more than $304,000."
Wyoming
Wyoming Enacts Tax Cuts for Homeowners, Businesses - Paul Jones, Tax Notes ($). "On March 4 Gov. Mark Gordon (R) approved S.F. 69, a bill establishing a 25 percent property tax exemption that applies to the first $1 million worth of a single-family residence’s fair market value."
Tax Policy Corner
Sales Taxation of Business Inputs - Council on State Taxation:
Imposing sales taxes on business inputs violates several tax policy principles and causes significant economic distortions. Taxing business inputs raises production costs and places businesses within a State at a competitive disadvantage to businesses not burdened by such taxes. Taxes on business inputs, including taxes on services purchased by businesses, must be avoided.
Explanation:
A sales tax on business inputs violates several tax policy principles—economic growth, equity, simplicity and efficiency—and causes a number of economic distortions. Notably, these distortions result from pyramiding, where a tax is imposed at multiple levels, such that the effective tax rate exceeds the retail sales tax rate. Companies are forced to either pass these increased costs on to consumers or reduce their economic activity in the State in order to remain competitive with other producers who do not bear the burden of such taxes. As a result of the choices businesses are forced to make, the economic burden of taxes on business inputs inevitably shifts to labor in the State (through lower wages and employment) or consumers (through higher prices).
Tax History Corner
Congress passed the first Earned Inccome Tax Credit 50 years ago next week with the Tax Reduction Act of 1975. Wikipedia explains:
The EITC was the most lasting feature of an anti-recession bill, which mostly consisted of otherwise forgettable stimulus measures, including a rebate - a check - of up to $200 for single filers or $400 for joint filers.
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