Revenue forecasts look increasingly grim as states anticipate shortfalls due to the slowing economy and impacts of the new federal tax law. Some states, like Illinois and Delaware, are working to address their shortfalls by decoupling from federal provisions that could chip away at their state tax bases. Both states are looking to reign in expanded corporate tax breaks, while Illinois reworked language to ensure it could implement its recently-passed 50 percent tax on Global Intangible Low Tax Income (or GILTI – now known as Net Controlled Foreign Corporation Taxable Income).
In addition to state actions around conformity, Pennsylvania has enacted a budget that creates the state’s first Earned Income Tax Credit – refundable at 10 percent of the federal credit – after decades of advocacy around credits for low- and middle-income families.
Major State Tax Proposals and Developments
- PENNSYLVANIA enacted a budget that includes a refundable Earned Income Tax Credit equal to 10 percent of the federal credit that is estimated to provide $193 million a year in benefits to low- and middle-income families. The budget also includes the continuation of the phased-down reduction to the state’s corporate income tax to 7.49 percent from 7.99 percent. – MILES TRINIDAD
- DELAWARE lawmakers are convening a special session to address a $400 million two-year shortfall caused by the federal tax bill. Lawmakers are focused on decoupling the state’s corporate tax code from the federal provisions, which would reduce the deficit to $73.8 million. – MILES TRINIDAD
- Lawmakers in ILLINOIS decoupled from the bonus depreciation deduction in OBBBA and adjusted language to ensure the state is conformed to the new definition of Global Intangible Low Tax Income (or GILTI – now known as Net Controlled Foreign Corporation Taxable Income). These two measures will help close the state’s $200 million deficit for fiscal year 2026. – NEVA BUTKUS
State Roundup
- Legislators, including Anchorage, ALASKA Mayor Suzanne LaFrance, are planning to introduce a 3 percent city sales tax to fund property tax cuts, housing, child care, and public safety.
- MARYLAND is facing a $1.4 billion shortfall in fiscal year 2027 driven by the federal tax bill, unanticipated spending on programs like Medicaid, and lower than expected revenue as Maryland’s economy has been slow to grow – in part because the Trump administration cut about 15,000 federal jobs in the state. The deficit comes after the legislature enacted $1.6 billion in new revenue earlier this year through taxes on high-income earners and capital gains to close a nearly $3 billion deficit at the time. Gov. Wes Moore says that additional tax increases are not on the table.
- MISSISSIPPI lawmakers discussed the possibility of implementing a cash assistance program for pregnant and new mothers in the state’s poorest communities. The program would be modeled after Michigan’s RxKids.
- MISSOURI Gov. Mike Kehoe indicated his desire to fully eliminate the state’s income tax, which makes up about two-thirds of the state general fund. The governor has not yet laid out a specific plan but said that he expects eliminating the tax would take several years.
- The Omaha Tribe of NEBRASKA are at an impasse with Gov. Jim Pillen and his allies over marijuana legalization and a compact to share tobacco tax revenue and administration.
- NEVADA lawmakers are likely to hold a special session to discuss expanding film tax credits, even as 98 percent are sold for cash rather than used to reduce tax liability because the production companies receiving them already pay little to no tax in the state.
- Newly elected NEW YORK City mayor Zohran Mamdani and other advocates of higher taxes on the rich have their work cut out for them in winning over Gov. Kathy Hochul, who has long opposed progressive tax increases and is now telling her constituents, “the more you push me, the more I’m not going to do what you want.”
- OREGON taxpayers are expected to receive a $1.4 billion rebate after personal income tax revenue came in at least 2 percent higher than lawmakers expected when setting the two-year budget, which is known as the state’s “kicker” law. While the state has regularly used the kicker law since the 2017-19 budget cycle, the state’s new chief economist has promised changes to revenue estimates that may make kicker payments less likely in the future.
- While RHODE ISLAND is expected to see an extra $202 million over the next two years, the state is currently facing a $300 million deficit heading into the next fiscal year. In addition to the deficit, legislators are expected to focus much of the 2027 legislative session compensating for federal funding cuts to Medicaid, food assistance, and other social programs.
What We’re Reading
- A new piece by the Kentucky Center for Economic Policy lays out the cost of a decade of tax cuts in the state. Of the findings, the top 20 percent of earners received almost two-thirds of the $8.3 billion in total federal and state tax cuts over that time.
- A recent ITEP blog summarizes results from some of the key state and local tax measures on the ballot last week.
- Reporting from Wyofile shows how property tax cuts in Wyoming have led to drastic cuts in parts of the state.
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