Key Takeaways
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Income tax rates may be falling, but states are quietly expanding the tax base elsewhere
- For many businesses, sales tax, digital taxes, and reduced incentives can offset promised rate relief
- Tax Tip: Tax Incentives Pressure & Changes in Iowa
Welcome to this edition of state tax developments. The State Tax News and Views is published weekly. Consider the Eide Bailly State & Local Tax team for your state tax planning, compliance and incentive needs.
State tax headlines love a good rate cut—flat taxes, phaseouts, “historic” income tax reductions.
But behind the scenes, many states are telling a very different—and far less publicized—story.
Across the country, states are pairing income tax rate cuts with tax base expansions, particularly in sales and use tax, excise taxes, and digital-economy transactions. The result? Taxpayers expect savings, but many end up with flat—or higher—tax burdens once all the changes are accounted for.
Income Tax Rate Cuts Get the Attention
Over the past several years, numerous states have reduced individual and corporate income tax rates or accelerated phaseouts toward flat-rate systems. Georgia, Missouri, Iowa, Mississippi, and Arizona are among the states continuing this trend into 2026.
These changes generate positive headlines, but rate reductions alone do not eliminate revenue needs.
As federal pandemic-era surpluses fade and budget pressures return, legislatures are increasingly looking elsewhere to stabilize revenue.
Base Broadening Does the Heavy Lifting
Rather than raising rates, states are expanding taxable bases in quieter, more technical ways, including:
- Expanding sales and use tax to additional services, digital goods, or SaaS
- Creating or increasing excise taxes on targeted activities (such as digital platforms or prediction markets)
- Narrowing or repealing exemptions, deductions, and credits that previously reduced the effective tax base
From a policy standpoint, this is often described as “modernization,” particularly where digital services or platform-based activity are involved. From a taxpayer standpoint, however, base expansion often functions just like a tax increase—only one that applies unevenly, is harder to spot, and is frequently underestimated.
Real-World Examples by State
Washington: No Income Tax, Bigger Sales Tax Footprint
Washington is a prime example of how a state can expand revenue without touching income tax rates. Because Washington does not impose a traditional corporate or individual income tax, businesses often assume their Washington exposure is limited. Recent legislation challenges that assumption.
Beginning October 1, 2025, Washington expanded its sales tax base to include numerous services long treated as nontaxable, including:
- Advertising services
- IT and IT-enabled services
- Custom software development
- Website development
- Certain digital automated services
Many of these transactions are now subject to retail sales tax and reclassified under the retailing B&O tax. For both service providers and customers, costs increased—not because rates went up, but because entire categories of transactions became taxable.
Georgia: Lower Rates, Shifting Burdens
Changes in Georgia illustrate how income tax relief and base expansion can move in opposite directions. In 2024, the state generated positive headlines by reducing individual and corporate income tax rates to 5.39%. That same year, however, Georgia expanded its sales tax base under S.B. 56 to include certain digital products, digital goods, and digital codes, increasing tax exposure in areas that had not previously been subject to sales and use tax.
For multistate businesses, the net savings from a lower income tax rate often depends on whether newly taxable digital transactions offset the headline savings.
Missouri and Iowa: Flat Taxes, Fewer Carve Outs
As states like Missouri and Iowa flatten their income tax structures, exemptions and targeted credits are facing increased scrutiny. As Matt highlights below, shifts in local incentive tools—such as Des Moines’ pause on new TIF reviews—don’t eliminate opportunity, but they do require businesses to more carefully assess how rate reductions and evolving incentive programs work together to support overall project economics.
Digital Economy States: Familiar Strategy, New Revenue Source
The digital economy has become one of the most attractive revenue targets for states looking to broaden tax bases without raising headline rates. As we discussed last week, digital activity is increasingly being used to offset income tax cuts and ongoing budget pressure—a theme playing out across multiple jurisdictions. Even as legal challenges and ITFA concerns persist, digital activity remains politically easier to tax and harder to relocate, making it an appealing revenue source.
Across multiple jurisdictions, states continue to explore:
- Digital advertising taxes
- Platform-based excise taxes
- Expanded SaaS taxation
The Expectation Gap
For taxpayers, the disconnect is predictable. Rate cuts are visible. Base changes are technical. A business may budget for a lower income tax rate while missing the fact that:
- Previously exempt services are now taxable
- Economic or digital nexus creates new filing obligations
- Sales tax sourcing rules pull additional receipts into high-tax states
For multistate businesses, effective tax rates often stay flat—or increase—despite the promised relief. These changes also tend to surface mid-year, complicating estimates, provisions, and audit risk assessments. None of these effects are obvious when reading a headline about a lower income tax rate.
The Net Result: Surprise Instead of Savings
To avoid surprise instead of savings, businesses should look beyond rate tables and focus on where exposure is actually changing, including:
- Sales and use tax taxability: Are services, SaaS, or digital products newly taxable in key states?
- State-specific definitions: Have states redefined what qualifies as a taxable sale?
- Nexus thresholds: Do economic or digital nexus rules now pull you into new jurisdictions?
- Sourcing rules: Have receipts shifted under destination-based or market-based sourcing?
- Contracts and pricing: Do agreements account for newly imposed sales or excise taxes?
- Effective tax rate modeling: Are base changes offsetting expected income tax savings?
The key takeaway: When states cut rates, the real question isn’t “What’s the new rate?”—it’s “What’s taxable now that wasn’t before?”
Lower rates don’t always mean lower taxes. Contact the Eide Bailly SALT team to evaluate how base expansion, digital taxes, and sourcing changes may be affecting your effective tax rate.
SEASONED WITH SALT
Tax Tips, Tricks, and Opportunities
Tax Incentives Pressure & Changes in Iowa - Matt Carlson, Eide Bailly:
While Iowa moves toward flatter income tax structures, changes at the local and state incentive level are shaping how—and where––those savings actually materialize. Des Moines’ decision to pause new Tax Increment Financing (TIF) reviews has created a notable shift in Iowa’s development landscape. TIF has long been a central tool for supporting redevelopment, infrastructure, and major commercial projects in the city. With reviews temporarily halted, developers and businesses may face delays or need to rethink how they structure financing for upcoming investments. While the pause is part of a broader evaluation of Des Moines’ long‑term TIF strategy, it introduces short‑term uncertainty for projects that previously expected local participation.
At the same time, Iowa is rolling out one of its most significant statewide programs in years: the Business Innovation & Growth (BIG) Program. BIG is designed to support high‑impact expansion, innovation, and capital investment across key industries, including advanced manufacturing, biosciences, and technology. The program offers flexible funding mechanisms and job‑creation support, making it an increasingly important option for companies that might otherwise have relied on local incentives like TIF. For many projects, BIG can serve as a strong anchor incentive while Des Moines reassesses its local tools.
Importantly, Iowa’s broader incentive ecosystem remains active and competitive. Many other programs continue to provide tax credits and financial assistance tied to job creation and capital investment. The Research Activities Credit supports R&D efforts, particularly in manufacturing and ag‑tech. Workforce training programs such as 260E and 260F help companies upskill employees, and industry‑specific incentives—like the Renewable Chemical Production Tax Credit—offer targeted support for specialized sectors. Many communities outside Des Moines also continue to offer TIF, tax abatements, and infrastructure assistance.
For businesses planning expansions or new investments, the message is clear: while Des Moines recalibrates its TIF strategy, Iowa as a whole is still very much open for growth. Companies should take this moment to reassess their incentive mix, explore eligibility for BIG, and consider how statewide programs can fill gaps left by the temporary TIF pause. The incentive landscape is shifting, but the opportunities remain strong for those who navigate it strategically.
