State Tax News & Views: The Voters Speak

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.

State voters uphold old taxes, but mostly fail to enact new ones. Voters upheld existing state taxes in Washington state and the Dakotas, but declined to enact a new business tax in Oregon.

Washington voters rejected an attempt to overturn the states new capital gain tax. They also upheld the state's "cap and trade" law on carbon emissions.

North Dakota voters rejected a plan to drastically limit property taxes in the state, while South Dakota voters turned down a referendum to eliminate sales tax on goods for "human consumption."

Details of these and other state tax votes this week are in the state detail below. A comprehensive list of state ballot measure results this year can be found here.

Passthrough Entity Taxes Eyed as SALT Cap Expiration Date Nears - Andrea Muse, Tax Notes ($):

With the expiration of the Tax Cuts and Jobs Act's $10,000 SALT deduction cap growing closer, tax pros at a panel pondered what considerations states will give to their passthrough entity taxes.

The taxes have been enacted in more than 30 states as a workaround to the cap by allowing passthroughs to elect to pay the tax on their owners’ income. The owners get a tax credit and can take a federal deduction for the tax paid at the entity level.

While Donald Trump said on the campaign trail that he favors eliminating the deduction cap, it's not clear that would get through Congress. Even if the cap is lifted, pass-through entity taxes could still be popular as workarounds on the nondeductibility of state taxes for the alternative minimum tax.

Alternatively, a revenue-hungry Congress could restrict entity taxes.

Companies Are Seeking Insurance to Cover State Tax Positions - Amy Hamilton, Tax Notes ($):

Until recently, submissions for coverage of state and local tax risks have been less common than coverage for federal and international tax positions, for which there has been a meteoric rise in the last few years, according to speakers on an October 28 panel at the 2024 Paul J. Hartman State and Local Tax Forum in Nashville, Tennessee.

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“We’ve seen within the last couple weeks a very large state tax risk come through the market,” said Scott A. Harty of Alston & Bird LLP, whose practice includes serving as underwriter’s counsel to insurers. “It was about half a billion dollars, I mean it was very, very significant. So, there are large policies out there.”

The best insurance is to stay on top of your state tax compliance. Even if you opt to buy insurance, a good compliance program will help keep your premiums down. That's where these folks can help.

State Tax Competitiveness

Tax Foundation updates state tax index; Wyoming, South Dakota, Alaska lead, while New York, New Jersey, and California bring up the rear.

From the introduction to this year's index:

The absence of a major tax is a common factor among many of the top 10 states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. South Dakota and Wyoming have no corporate or individual income tax; Alaska has no individual income or state-level sales tax; Florida and Texas have no individual income tax; and New Hampshire and Montana have no sales tax, with New Hampshire also only imposing a narrow tax on interest and dividend income.

This does not mean, however, that a state cannot rank well while still levying all the major taxes. Indiana, for example, levies all the major tax types, as do all the other states that rank 11^th to 16^th: Idaho, North Carolina, Missouri, Arizona, Michigan, and Utah.

State-By-State Roundup

California

SF Voters Agree To Overhaul City's Business Tax Regime - Maria Koklanaris, Law360 Tax Authority ($):

By a vote of 69.19% to 30.81% on Tuesday, with 94% of precincts reporting, voters passed Proposition M, meaning that the gross receipts tax, now imposed at a range between 0.053% and 1.008%, will increase to 0.1% to 3.716%.

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At the same time, however, about 2,700 businesses, including many of the city's restaurants, will be exempt from the tax. Currently, the threshold for exemption is $2.25 million in gross receipts. That will rise to $5 million.... And it will make significant changes to San Francisco's homelessness gross receipts tax. Currently, that tax is levied on businesses with at least $50 million in gross receipts and the rate is between 0.175% and 0.69%. That will change to include businesses with at least $25 million in gross receipts, with a rate schedule between 0.162% and 1.64%.

After a bitter fight, Tahoe voters reject controversial housing law - Julie Brown Davis, SFGATE:

South Lake Tahoe voters on Tuesday defeated a controversial measure to tax second homes. El Dorado County posted election results at midnight that showed 73.83% of voters said no to Measure N.

Measure N, also known as the vacancy tax, would have taxed homeowners who spend less than 182 days of the year in South Lake Tahoe as much as $6,000 annually.

CA Prop. 35 Passes: Permanent Managed Care Tax For Medi-Cal Funds - Michael Wittner, Patch. " Voters have decided in favor of Proposition 35, which aims to establish a permanent tax on managed care health plans, according to an AP race call cited by Cal Matters. The Los Angeles Times also called the race."

California Governor Proposes Film Tax Credit Expansion - Paul Jones, Tax Notes ($). "Newsom's plan would raise the allocation for the Film & Television Tax Credit Program from $330 million to $750 million annually."

Colorado

Colorado Governor Proposes to Extend Business Credits, Create Film Credit - Emily Hollingsworth, Tax Notes ($). "Colorado Democratic Gov. Jared Polis's proposed budget includes a tax incentive for film festivals, an extension of business tax credits, and the elimination of a sales tax exemption on downloadable software."

Colorado Voters Approve New Tax on Firearms, Ammo in Only Major Gun Referendum - Jake Fogleman, The Reload. "Colorado voters officially approved Proposition KK by a margin of 54.2 percent to 45.8 percent. With 73 percent of the vote recorded, the Associated Press called the race early Wednesday morning. The vote will impose a new 6.5 percent state-level excise tax on firearm and ammunition sales, with the revenue earmarked to fund crime victim services."

Georgia

Ga. Voters Approve Expanded Reach Of State Tax Court - Jaqueline McCool, Law360 Tax Authority ($). "Amendment 2 was passed by Georgia voters 2,467,876 to 2,284,665 with 96% of the vote counted. The amendment broadens the state tax court power to give it the "judicial power of the state," the amendment says. The amendment replaces the current administrative tax tribunal with a state tax court within the judicial branch of the state government."

All states should have a judicial branch specialist court for tax matters. Many don't.

Illinois

Ill. Voters Back Millionaire Tax In Nonbinding Referendum - Paul Williams, Law360 Tax Authority ($). "Voters approved the nonbinding ballot measure by a vote of 2,658,887 to 1,746,546 with 78% of the votes counted, signaling that they back the concept of levying a 3% surtax on incomes greater than $1 million toraise funds dedicated to property tax relief. Although the outcome of the votedoesn't alter the Illinois Constitution's requirement to levy a single income tax rate, which is currently set at 4.95% in state statute, its supporters could use it as fuel to renew conversations about asking voters to scrap the flat tax."

Louisiana

La. House Panel OKs Flat Income Tax, Nix Of Franchise Tax - Paul Williams, Law360 Tax Authority ($):

The Republican-controlled House Ways and Means Committee voted to advance H.B. 1 and H.B. 3, over the objections of some Democrats. The bills would restructure Louisiana's three-bracket income tax system into a single rate with a higher standard deduction and repeal the corporate franchise tax.

The bills are part of a suite of tax-related legislation that Republican Gov. Jeff Landry is pushing lawmakers to consider in a special session that began Wednesday. The committee will consider more measures in the coming days that would carry out other elements of Landry's proposal. That includes bills to expand the state's sales tax base to encompass a host of transactions that the state doesn't currently tax, including digital goods and services, move to a flat corporate income tax rate, and allow local governments to opt out from imposing an inventory tax.

New Jersey

NJ Governor Signs Bill Amending Senior-Aimed Property Tax Break - Danielle Muoio Dunn, Bloomberg ($). "New Jersey Gov. Phil Murphy (D) signed a bill Friday revising provisions of the StayNJ property tax relief program, which will provide seniors with gross income below $500,000 with a 50% credit on the annual tax bill for their principal residence, up to $6,500."

North Dakota

North Dakota voters reject property tax ballot measure - Mary Steurer, North Dakota Monitor:

North Dakota voters defeated a measure Tuesday night that would have overhauled the state’s tax system by banning property taxes based on assessed value

Roughly 63% of ballots were cast against the proposal in complete but unofficial results.

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To replace revenues lost by eliminating the tax, the proposal would have required the state to reimburse local governments every year by an amount no less than the property taxes those entities levy for the 2024 tax year.

Nevada

Nevada voters lift sales taxes off diapers - Grace Da Rocha, Las Vegas Sun. "A constitutional amendment exempting child and adult diaper purchases from sales taxes appeared to be overwhelmingly approved by Nevada voters."

Oregon

Oregon Voters Reject New Tax On Big Businesses - Sanjay Talwani, Law360 Tax Authority ($):

By a vote of 1,223,568 to 325,800 with 53.5% of the votes counted, Oregon voters defeated Measure 118, which would have created a new minimum tax on businesses with more than $25 million in annual Oregon sales, and dedicated the funds for flat rebates to residents that could have been worth about $1,600 each. The new 3% minimum corporate tax, if imposed, was projected to raise about $15 billion in the 2025-27 biennium, according to a September report from the state Legislative Revenue Office.

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The measure faced opposition from elected officials of both parties. In August, the Democratic leadership of both state legislative chambers jointly opposed the measure, calling it a "California-funded" initiative. Citing a July analysis from the legislative research office saying the measure will significantly alter the mix of state tax revenues, the lawmakers warned of significant shortfalls in the funding needed to provide key government services.

Pennsylvania

Pennsylvania Increases Concert Rehearsal and Tour Tax Credit - Tyrah Burris, Tax Notes ($). "The state's Entertainment Economic Enhancement Program provides qualifying musical performers and concert tour management or promotion companies with a credit equal to a percentage (up to 25 percent under previous law) of their total qualifying concert tour and rehearsal expenses in the state. The credit can be used to offset recipients' Pennsylvania tax liabilities or sold or assigned to another entity. Excess credits can be carried over by recipients to succeeding tax years but can't be refunded or carried back. To qualify for the credit, recipients must hold concerts at two or more class 1, 2, or 3 venues in the state."

South Dakota

South Dakota's 'grocery tax' will remain after voters decline to repeal it - Trevor Mitchell, Sioux Falls Argus Leader:

South Dakota voters turned down Initiated Measure 28 on Tuesday, marking another failure to repeal the state's grocery or consumable tax, although it's likely that much of the opposition to the measure came from concerns that by the time the legislature and the courts had ironed out the details of the measure, it would be more than just groceries that could no longer be taxed.

Multiple news outlets, including the Associated Press, called the race before ballots had been fully counted in South Dakota. As of 12:20 a.m. Wednesday, the South Dakota Secretary of State's website showed that 54,964 people had voted in favor of the measure, while 145,289 had voted against it,

Utah

Workers Comp Premium Tax Falls for 2025. Via Utah Tax Bulletin 24-24: "Effective Jan. 1, 2025, the Utah workers’ compensation insurance premium tax rate will decrease to 1.2 percent."

Washington

Washington’s capital gains tax survives repeal effort - Grace Deng, Washington State Standard:

An initiative to repeal Washington’s capital gains tax, which levies a 7% tax on the sale or exchange of long-term assets like stocks, bonds and business interests, was defeated Tuesday.

Voters were opposing Initiative 2109 by 63.2% to 36.8%. Vote counting will continue in the days ahead.

John Gupta, Eide Bailly Director of State & Local Tax Services, comments:

Following failed attempts to overturn the Capital Gains tax in the courts, conservative groups sponsored an initiative asking Washington voters to outright repeal the tax. The tax, which the Washington Supreme court recently upheld as an “excise tax” tax rather than a constitutionally prohibited income tax, funds over $2 billion in education related services over the next five years. Predictably, the repeal measure was roundly rejected by Washington voters by a wide margin. With the new tax on firm ground following these challenges, it remains to be seen if warnings of migration of wealthy citizens from Washington materialize.

Washington High Court Limits B&O Deduction to Incidental Investment - Andrea Muse, Tax Notes ($). "Washington state's business and occupation (B&O) tax deduction for investment income can't be used for income earned from the main business activities of 16 investment fund limited liability companies, the state supreme court held."

Tax History Corner: Chicken (Tax) Nugget

The "Chicken Tax," 60 years on. The election of Donald Trump on a pro-tariff platform brings to mind another election in which tariffs played a role. It is discussed in "The Chicken Tax and Its Influence on the U.S. Auto Industry," by Robert Longley:

In January 1964, after Chicken War diplomacy failed, President Johnson imposed a 25% tariff — almost 10 times higher than the average U.S. tariff — on chicken. And, thus, the Chicken Tax was born.

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During the early 1960s, sales of Volkswagens surged as America’s love affair with the iconic VW “Bug” coupe and Type 2 van shifted into overdrive. By 1963, the situation got so bad that Walter Reuther, president of the United Automobile Workers Union (U.A.W.), threatened a strike that would have halted all U.S. auto production just before the 1964 presidential election.

Running for reelection and aware of the influence the U.A.W. had in Congress and in the minds of voters, President Johnson looked for a way to persuade Reuther’s union not to strike and to support his “Great Society” civil rights agenda. Johnson succeeded on both counts by agreeing to include light trucks in the Chicken Tax.

While U.S. tariffs on other Chicken Tax items have since been rescinded, lobbying efforts by the U.A.W. have kept the tariff on light trucks and utility vans alive. As a result, American-made trucks still dominate sales in the U.S., and some very desirable trucks, like the high-end Australian-made Volkswagen Amorak, are not sold in the United States.

Any tax leads to tax planning, and the Chicken Tax is no exception. An example via Wikipedia:

Ford imported all of its first-generation Ford Transit Connect models as "passenger vehicles" by including rear windows, rear seats, and rear seat belts.^[1] The vehicles are exported from Turkey on ships owned by Wallenius Wilhelmsen Logistics (WWL), arrive in Baltimore, and are converted back into light trucks at WWL's Vehicle Services Americas, Inc. facility by replacing rear windows with metal panels and removing the rear seats and seat belts.^[1] The removed parts are not shipped back to Turkey for reuse, but shredded and recycled in Ohio.^[1] The process exploits the loophole in the customs definition of a light truck; as cargo does not need seats with seat belts or rear windows, presence of those items automatically qualifies the vehicle as a "passenger vehicle" and exempts the vehicle from "light truck" status. The process costs Ford hundreds of dollars per van, but saves thousands in taxes.^[1] U.S. Customs and Border Protection estimated that between 2002 and 2018 the practice saved Ford $250 million in tariffs.^[23]

Until next time, happy poultry!

State Tax News & Views: The Voters Speak

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Joe B. Kristan, CPA