State Tax News & Views: Wealth Taxes and Wool Taxes

Welcome to this edition of our roundup of State and Local Tax News. Remember Eide Bailly for your State and Local Tax and Business Incentive Needs.

State Corporate Income Tax Rates and Brackets, 2024 - Katherine Loughead, Tax Foundation:

Corporate income taxes are levied in 44 states. Though often thought of as a major tax type, corporate income taxes accounted for only 7.07 percent of state tax collections and 3.32 percent of state general revenue in fiscal year (FY) 2021. And while these figures are not high, they represent a substantial increase over prior years. Corporate income taxes accounted for 2.27 percent of general revenue in FY 2020, which is more in line with historical norms.

Minnesota levies the highest top statutory corporate tax rate at 9.8 percent, followed by Illinois (9.5 percent) and Alaska (9.4 percent). New Jersey, which levied the highest corporate rate in the country of 11.5 percent from 2021-2023, now has the fourth-highest rate (9 percent), as the state’s 2.5 percentage-point corporation business tax surcharge expired at the end of 2023. Going back several years, Iowa shed a top marginal rate of 12 percent (albeit with deductibility for federal taxes paid) and Pennsylvania began phasing its 9.99 percent rate down to—eventually—4.99 percent.

Practitioners Say State Marketplace Facilitator Laws Need Reform - Paul Jones, Tax Notes ($):

Loose definitions, cumbersome requirements, and practical challenges created by many marketplace facilitator laws — most of which were approved after the South Dakota v. Wayfair Inc. decision — cause problems for facilitators and sellers alike, panelists said during the American Bar Association Section of Taxation's midyear meeting.

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During the discussion, Hughes, Stefi George of Akerman LLP, and Trisha Davidson of Yetter Tax discussed the problems that have arisen since the approval of marketplace facilitator laws. Initially conceived to capture high-profile marketplaces like Amazon, the laws and regulations in some states have broad definitions that apply to many different types of businesses that play different roles in facilitating sales.

“You could actually have a marketplace facilitator in some states, where they qualify as a marketplace facilitator, they have a tax collection obligation, and . . . they don't touch the money,” Hughes said. Such facilitators are obligated to remit the tax even though they don't collect payment, “so [it’s a] bit of an awkward position,” he added.

Related: How Wayfair Changed the Sales Tax Reform Landscape.

State Tax Changes: What’s New for 2024 - Kelley Taylor, Kiplinger.

In California, income tax rates rise this year for some taxpayers since the top tax rate on earned income effectively goes from 13.3% to 14.4%  in 2024. The California 1.1% payroll tax now applies to all wage income. (It previously applied only to those making up to $153,164.)

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Meanwhile, Minnesota has revamped its net investment income tax rules. (There is a 1% Minnesota state tax on a portion of net investment income over $1 million.) 

State-By-State Roundup

District of Columbia

The Nation’s Capital Wrestles With Overhauling Its Tax System - Michael Bologna, Bloomberg ($):

Several members of the commission, including Chairman and former Mayor Anthony Williams, expressed deep reservations about the primary revenue-raiser in the package—a brand new business activity tax, or BAT, which was projected to raise $275 million to offset the repeal of a half-dozen business taxes and fees currently embedded in the tax code.

The BAT is portrayed as a low-rate (1.4%) tax on gross receipts, minus certain business inputs and capital expenditures, across a broad group of businesses operating in the district. The BAT would also be creditable against the district’s corporate franchise and individual income taxes. 

Related: Resisting the Allure of Gross Receipts Taxes: An Assessment of Their Costs and Consequences

Georgia

Georgia House speaker proposes additional child income-tax deduction atop other tax cuts - Jeff Amy, Assoicated Press. "House Speaker Jon Burns on Wednesday said his GOP caucus will back a plan to raise the amount that parents can deduct per child from their yearly state income taxes to $4,000 from the current $3,000. With Georgia’s income tax rate currently at 5.49%, that works out to as much as $55 more per child, or about $150 million statewide."

Hawaii

Hawaii Holiday Rentals Turned Homes Targeted for New Tax Breaks - Laura Mahoney, Bloomberg ($). "The Democratic governor urged Hawaii lawmakers in his State of the State address to pass his proposal for tax amnesty when vacation rental owners sell to local residents who move into the homes or make them long-term rentals for locals. The sellers would be exempt from capital gains tax, conveyance tax, and general excise tax. The amnesty period would begin in fall 2024 and run for 24 months."

Iowa

Iowa Lawmaker Proposes Income Exclusion for Deferred Compensation - Emily Hollingsworth, Tax Notes ($):

The bill would amend Iowa Code section 422.7(19)(a) to exempt from income tax nonqualified deferred compensation plans — defined under the bill as "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" — retroactive to tax years beginning on or after January 1, 2024.

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According to the bill, the exclusion is meant to mirror the state’s exclusion of retirement income under H.F. 2317, which became law in 2022. The Department of Revenue recently adopted rules that implement the retirement income exclusion.

Link: HF 2105

Louisiana

La. Issues Emergency Rule On Capital Gains Deduction - Michael Nunes, Law360 Tax Authority ($). "In the regulation, which was issued Friday, the department will require taxpayers who receive the deduction for capital gains from the sale of business assets to provide information on when they acquired an interest in the business. They must also provide a complete copy of their federal form 1040 for the period when the gain was recognized and a copy of a taxpayer's federal Schedule K-1 from the entity the gain was derived from will also be required."

Link: Emergency Rule. 

Massachusetts

Mass. Gov. Files Bill To Let Cities Boost Local Taxes - Sanjay Talwani, Law360 Tax Authority ($). "Healey's bill, filed Monday, would raise the maximum local option lodging tax from 6% to 7%, and from 6.5% to 7.5% in the city of Boston. It would also raise the maximum local option meal tax from 0.75% to 1% and allow jurisdictions to add a 5% surcharge to their local motor vehicle excise taxes."

Michigan

Michigan Governor Calls for R&D Credit, Tax Breaks for Small Businesses - Emily Hollingsworth, Tax Notes ($). "Among the legislative priorities Whitmer highlighted during her January 24 State of the State address were the strengthening of economic development incentives and tax breaks for small businesses, which she said would help Michigan compete with neighboring states. She called for reviving the state’s research and development tax credit, which she said would 'unleash innovation while lowering costs for businesses.' Legislation to revive the credit was approved by the House in October 2023 but stalled in the Senate."

Mississippi

One-Day Delivery: Mississippi Legislature Approves Incentives for Amazon - Matthew Pertz, Tax Notes ($).:

The Mississippi Legislature held a second special session in as many weeks to approve a massive incentive package in exchange for Amazon investing $10 billion to build two data centers in the state.

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All income arising from the project would be exempt from state corporate income tax for 10 years as long as the jobs do not fall below the minimum annual number of full-time jobs required for two consecutive years. Amazon would still be required to pay income tax on its other activities in the state. The project would also receive a fee-in-lieu agreement for state franchise tax that would expire in 2028.

Nebraska

Nebraska Governor Urges Property Tax Cuts, Incentives Reform - Emily Hollingsworth, Tax Notes ($):

Several lawmakers have already introduced measures to carry out Pillen’s legislative priorities.

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[Senator Lou Ann Linehan] on January 17 also filed L.B. 1410, an economic development measure that would scale back tax breaks and expand the uses of credits under the ImagiNE Nebraska incentive program. The bill would reduce the tax credits for wages paid to new employees and investments made to qualifying property. But L.B. 1410 would allow employers to use credits to invest in workforce housing and pay up to 50 percent of child care costs for employees. Credits used for those purposes can be submitted to the state to obtain a payment equal to the amount spent. The bill would take effect upon enactment.

North Dakota

North Dakota Governor Seeks to Eliminate State Income Tax - Emily Hollingsworth, Tax Notes ($). "Burgum’s proposal extends beyond the income tax relief measures he approved in 2023 under H.B. 1158, which reduced North Dakota’s five income tax brackets to three for tax years beginning on or after January 1, 2023, and decreased the top income tax rate from 2.9 percent to 2.5 percent."

Rhode Island

Rhode Island Governor's Budget Would Extend NOL Carryforward Period - Benjamin Valdez, Tax Notes ($). "The governor’s budget would also modify the state’s elective workaround to the federal cap on the state and local tax deduction for passthrough entities, lowering the credit allowed to entity owners for taxes paid on the entity-level from 100 percent to 90 percent — a change that would more closely align Rhode Island with the workarounds in neighboring Massachusetts and Connecticut. The workaround was enacted in 2019 as a way for passthroughs to avoid the $10,000 SALT deduction cap imposed by the Tax Cuts and Jobs Act."

South Carolina

Amazon Owes $12.5M In Sales Tax, SC Appeals Court Rules - Maria Koklanaris, Law360 Tax Authority ($):

In an opinion issued nearly a year after the panel heard oral arguments in the case, Judge Jerry Vinson affirmed the South Carolina Administrative Law Court's decision, which in September 2019 affirmed the roughly $12.5 million tax assessment from the South Carolina Department of Revenue. The administrative law judge found Amazon was in the "business of selling" as defined under the state sales and use tax act and therefore was responsible for tax on third-party sales by merchants on its marketplace.

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"We find the ALC did not err in determining Amazon Services was engaged in the business of selling tangible personal property at retail and was therefore responsible for collecting and remitting sales tax on sales of tangible personal property owned by third parties occurring on the marketplace," Judge Vinson wrote.

Vermont

Vermont Lawmakers Focus on Wealth Tax, High-Income Surtax Bills - Michael Bologna, Bloomberg ($). "The state House Ways and Means Committee held a hearing that examined tax bills that would raise hundreds of millions of dollars in new revenue from wealthy Vermonters. One bill, H.828, would impose a 3% surcharge on income north of $500,000 beginning in the current tax year. The second, H. 827, would create a first-in-the-nation wealth tax scheme, imposing income tax on the unrealized gains of taxpayers with net assets higher than $10 million."

Washington

Initiative Banning Income Taxes Goes to Washington Lawmakers -  Laura Mahoney, Bloomberg ($):

Washington state and local jurisdictions would be barred from enacting income taxes under a ballot measure the secretary of state’s office certified on Wednesday.

The measure is a companion to one certified a day earlier to repeal the state’s capital gains tax enacted in 2021. Both are part of a package of six initiatives backed by a conservative group called Let’s Go Washington. The group’s founder, Brian Heywood, sees the capital gains tax—labeled as an excise tax—as the first step toward unraveling long-standing prohibitions on income taxes and taxes that are levied at varying rates. The limitations stem from the state constitution, as well as past legal rulings and ballot measures.

Tax History Corner

As noted above, Vermont is considering a wealth tax. While this would be a first for a state, it has been tried before. The book Rebellion, Rascals, and Revenue: Tax Follies and Wisdom through the Ages has some background:

The Greeks had hit on a neat approach to this problem long ago: the wealthy could be exempted from financing the liturgies, but only if they would exchange all their property for that of someone who would take the charge on. This gave them an incentive not to egregiously understate their own wealth.

A lawyer who was part of my weekly tax lunch group had the same idea - he said estate tax valuation would be a lot easier if the amounts shown on the return would be considered an option issued to the IRS to buy the estate's property for that amount. 

The book also notes practical problems that arise in taxing wealth:

Inevitably, favoritism and mendacity were pervasive: "Our estates that be £30 or £40 in the Queen's books," Sir Walter Raleigh told Queen Elizabeth, "are not the hundredth part of our wealth." The commodity-based excises and tariffs, in contrast, had a much more readily observed and verifiable tax base: bales of wool could be counted.

Full disclosure: I have no bales of wool.