State Rundown 5/2: Vetoes and New Major Tax Proposals

This week, many states took steps toward enacting tax cuts. Some of which would do more to benefit high-income families. Others stopped regressive tax cuts or moved the needle on refundable credits for low- and middle-families.

Kansas Gov. Laura Kelly vetoed the legislature’s most recent tax cut plan, which marks the third time the legislature has failed to override a veto over the past two years. Meanwhile, Iowa enacted legislation that deepens and accelerates its currently scheduled, regressive tax cuts. And the Hawai’i legislature unveiled a major state income tax cut that would result in $1.4 billion in lost annual revenue once fully phased in. The legislation swiftly passed both chambers. Colorado lawmakers coalesced around a tax deal that would pair reductions to the state income tax and sales tax with refundable credit increases that could greatly reduce child poverty.

Major State Tax Proposals and Developments

• COLORADO Democrats announced a tax deal with Gov. Jared Polis, as lawmakers continue to reimagine how the state can distribute TABOR refunds. The plan, which is expected to cut child poverty, includes a new credit, similar to a more robust Child Tax Credit, and increases to the state’s Earned Income Tax Credit. In response to some of the governor’s priorities, lawmakers also agreed to cut income tax rates in years when the budget surplus exceeds $300 million (resulting in a $450 million cut this year) and a temporary sales tax cut from 2.9 percent to 2.77 percent when the surplus exceeds $1.5 billion.  – MARCO GUZMAN
• Both chambers of the HAWAI’I legislature voted unanimously to approve a major state income tax cut that is estimated to cost more than $5 billion by 2030. The bill would alternate increases to the standard deduction and adjustments to income tax brackets through 2030. An ITEP analysis found that 42 percent of the overall benefits from the cuts would go to the top 20 percent of earners who, on average, earn $304,000 a year. A separate bill that would have exempted some of the state’s wealthiest households from the estate tax failed to advance in the legislature. – MILES TRINIDAD
• IOWA Gov. Kim Reynolds signed legislation that will deepen and accelerate the state’s tax cuts that are in the process of phasing-in. The new tax cut will consolidate and lower the state’s multi-rate personal income tax structure to a flat 3.8 percent in 2025, as opposed to a flat 3.9 percent by 2026. The new tax cuts will reduce revenues by $328 million in 2025 and $605 million in 2026. An analysis by ITEP shows that 68 percent of the tax cut from 2024 to 2025 will go to households in the top 20 percent with average annual household incomes of $286,300. – NEVA BUTKUS
• Tax cut proposals in KANSAS remain in flux as the Senate failed to override Gov. Laura Kelly’s veto of the legislature’s most recent tax plan – marking the third time the legislature failed to override the governor’s veto of a tax plan in two years. The legislature then promptly passed another tax cut reminiscent of the recently vetoed proposal. This plan would lower the state’s personal income tax rates slightly less than the recently vetoed plan, but would still condense to a 2-bracket structure. It would also fully exempt Social Security income from tax, increase the standard deduction and personal exemption, increase the homestead exemption, and lower the mill levy to public schools. The bill is expected to cost $2.3 billion over 5-years, and lawmakers on both sides of the aisle believe the cost will be a non-starter for Gov. Kelly. With the legislative session ending, lawmakers expect to be called back for a special session to finalize a tax bill. – NEVA BUTKUS

State Roundup

• Gov. Ron DeSantis of FLORIDA signed legislation that will create multiple sales tax holidays this fiscal year. These include back-to-school tax holidays, a tax holiday to purchase tools, and a “Freedom Summer” tax holiday that will exempt outdoor recreation supplies, fishing supplies, and tickets to state parks and museums.
• MAINE Gov. Janet Mills vetoed a bill that would have made the state’s income tax more progressive. The proposed legislation would have created a higher tax bracket for those earning over $500,000 while reducing taxes for low- and middle-income households. The governor noted in her veto letter that the speed with which the bill moved through the legislature “deprived the public of a meaningful opportunity to be heard.”
• MARYLAND Gov. Wes Moore signed legislation that allows local jurisdictions to impose higher property tax rates on structures and lots that are vacant. Baltimore city leaders hope the legislation will spur redevelopment of more than 13,000 vacant homes or hand over the property to the city.
• MASSACHUSETTS Gov. Maura Healey recently announced to business leaders that there are no plans for new taxes or to raise existing taxes. The governor, however, has still offered her support for bills that would allow municipalities to levy local taxes such as fees on certain high-value real estate sales, taxes on meals and lodging, and surcharges on top of existing vehicle excise taxes.
• The MISSOURI Senate Freedom Caucus dropped their conditions—Gov. Parson’s signature on a legal change attacking Planned Parenthood and advancing changes to the state’s ballot process—for allowing a bill reauthorizing a tax on healthcare providers to advance. After the time-intensive holdup, the legislature has until May 17^th to pass bills this session.
• Local lawmakers in PENNSYLVANIA are pushing to reform the state’s uniformity clause that requires all state and local taxes to have the same percentage for all properties and taxpayers. Philadelphia Mayor Cherelle Parker said the clause is an obstacle to the city’s tax reform plans.
• SOUTH CAROLINA Senators are looking to accelerate the state’s personal income tax cut that was passed in 2022 by implementing a top income tax rate of 6.2 percent in 2024 as opposed to the 6.3 percent rate under current law.

What We’re Reading

• In a piece from the Associated Press New Orleans, Louisiana mom Derrika Richard discusses how new local funding for childcare from a voter-approved local property tax increase allowed her to afford sending her young children to daycare, earn more, and even go back to school.
• Professors Lisa De Simone and Bridget Stomberg break down some deceptive claims about the 2017 TCJA tax bill and lay out how the actual winners were the wealthiest Americans.
• The AP highlights efforts in several cities to raise taxes and put revenue toward providing childcare services and the impact they are having on working families.

 

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