As state legislatures reconvene and we kick off a new year, several states are facing revenue shortfalls. Some lawmakers are approaching the challenge with sustainable and equitable solutions. Hawai’i, for instance, faced with a nearly $3 billion shortfall, is considering some rollbacks to its $7 billion in recently enacted tax cuts. Washington, faced with a $2.3 billion revenue shortfall through mid-2027, is discussing revenue raisers to fill the gap – most recently, Gov. Bob Ferguson announced support for a tax on millionaires’ income. Similarly, Rhode Island Gov. Dan McKee has expressed new openness to a surtax on top earners, citing federal cuts and their detrimental effect on the state’s budget.
Major State Tax Proposals and Developments
- HAWAI’I Gov. Josh Green and state lawmakers are expected to make revenue a central focus in the upcoming legislative session as the state faces a projected $3 billion revenue shortfall caused by federal policies and an economic slowdown. Among the options to address the shortfall, lawmakers are considering a pause on some of the income tax cuts that were passed in 2024 and scheduled to phase in through 2031, which are estimated to cost the state $7 billion over the next six years. – MILES TRINIDAD
- In RHODE ISLAND Gov. Dan McKee signaled new openness to a surtax on top earners, specifically proposals on income over $1 million. He cited federal reductions in Medicaid, food assistance, and other programs driving the need. However, cutting in the opposite direction – both on revenue and progressivity – Gov. McKee said the increase should be paired with business tax cuts and tax subsidies for senior citizens. Lawmakers are revisiting a proposal for a 3 percent surtax on the top 1 percent of earners in the state – those with incomes over $640,000. – MILES TRINIDAD
- WASHINGTON Gov. Bob Ferguson recently announced his support for a proposed income tax on residents with incomes over $1 million to raise at least $3 billion in new revenue and to help bring equity to the state’s tax system, which is ranked second on ITEP’s Inequality Index. His recommendation also includes increases and eligibility enhancements to the state’s Working Families Tax Credit as well as business tax cuts. – MARCO GUZMAN
State Roundup
- A COLORADO ballot measure that would have moved the state tax structure from a flat income tax to a graduated income tax was denied by a state board after it was determined that the measure had multiple subjects and lacked jurisdiction. The coalition behind the previous measure has submitted a series of new measures to continue the process towards a final ballot measure.
- Various property tax cut proposals making their way through the FLORIDA legislature are raising concerns for cities and municipalities who fear these new proposals will jeopardize their ability to fund local government.
- Senate Republicans in GEORGIA released their plan to overhaul the state’s tax system. The proposal would reduce the state’s personal and corporate income taxes to 4.99 percent in 2026, implement a new standard deduction of $50,000 for single filers and $100,000 for married filers in 2027, and then continue to decrease the personal income tax rate until it is completely eliminated.
- HAWAI’I’s new “green fee” on cruise ships to fund environmental and climate change resilience projects has been blocked by a federal judge while a legal dispute on the new fee continues to face litigation in court. The block on the new fee, which projected to raise $100 million in the upcoming year, is estimated to reduce state revenue by 10 percent.
- IOWA legislative Democrats proposed a package of property tax cuts, including freezing payments for all seniors regardless of income, increasing the state’s Homestead exemption, and capping overall property tax growth.
- Some ILLINOIS lawmakers are pushing for reconsideration of a progressive income tax structure amidst the state’s budget woes, although this is unlikely to be a priority during the 2026 session.
- Also in ILLINOIS, Chicago passed a 2026 budget with a new sports betting tax and a new social media tax without the mayor’s signature. Mayor Brandon Johnson’s preferred corporate head tax was rejected by aldermen. The city maintains a structural deficit despite these changes.
- OHIO Gov. Mike DeWine signed five property tax bills aimed at limiting property tax growth by capping increases to inflation, expanding county authority to reduce excessive levies, and giving auditors more control over valuations. These measures were enacted to limit property tax increases while lawmakers continue to resist a citizen-led initiative to abolish property taxes entirely.
- A RHODE ISLAND commission released a proposed major overhaul of the state’s school funding formula, aiming to shift a larger share of education costs from municipalities to the state. The plan would base local contributions on property tax capacity and have the state cover the remaining costs while also including expenses like special education, transportation, and teacher pensions in the formula.
- SOUTH CAROLINA lawmakers are assessing the impact from the Trump tax law which they say could reduce state revenues by $500 million in the coming fiscal year. South Carolina is one of a handful of states that start their state income tax calculations using Federal Taxable Income as opposed to Federal Adjusted Gross Income, which means federal tax changes are more likely to impact their state tax base. Lawmakers proposed moving to Federal Adjusted Gross Income during the 2025 legislative session, but the proposal was shot down since the move would raise taxes on many South Carolinians – particularly those with significant itemized deductions.
- NEBRASKA lawmakers enter their 60-day session facing a nearly $500 million revenue shortfall created largely by income tax cuts for high-income households that are still phasing in. Gov. Jim Pillen and his allies are in lock-step in denying the role of those tax cuts in the shortfall, calling to slash services to balance the budget instead. Others are hoping to salvage services by pausing or reversing those cuts, or raise revenue elsewhere, but they are likely in the minority.
- NEW MEXICO‘s Health Care Authority Fund will use $17.3 million to help shield residents from health insurance premium increases after Congress did not extend tax credits that expired Dec. 31.
- NEW YORK Gov. Kathy Hochul is jumping on the “no tax on tips” bandwagon. She is proposing to adopt the misguided federal policy in her state, which would cost an estimated $373 million while doing nothing for most low-income families and divisively favoring some workers (servers, bartenders) over others (cooks, fast-food workers, child care providers).
- OREGON’s recently passed transportation taxes, including a gas tax increase and increased DMV and payroll fees, are set to be blocked after a referendum to repeal the new taxes received enough signatures to be placed on the upcoming November ballot. The new taxes were enacted to cover a $354 million transportation budget deficit, and Democrats have warned that blocking the funding would destabilize transportation funding and threaten safety.
- A UTAH lawmaker is proposing another cut to the state’s personal income tax despite a tight budget year. The proposal would cut the state’s flat rate from 4.5 to 4.45 percent.
- The VERMONT Democratic Senate President announced a proposal that would force school districts to limit budget increases in fiscal years 2028 and 2029 in response to expected double-digit percentage increases in property tax bills next year. However, House Democrats have already pushed back against the bill as the legislature continues to pursue education funding reforms.
- WEST VIRGINIA Gov. Jim Morissey claimed that the state can afford to cut taxes again and indicated his support for reducing the state’s personal income tax.
What We’re Reading
- A new ITEP blog ITEP highlights ways in which Texas is looking to be more like California! The piece cautions Texas lawmakers who are considering Gov. Greg Abbott’s property tax cut proposal, which is eerily similar to California’s Proposition 13.
- States, reasonably, have been skeptical of adopting the changes to taxing to tipped and overtime income changes from the Trump Tax Law.
- New York’s Fiscal Policy Institute lays out a plan to fund universal childcare in the state through progressive revenue sources such as a small levy on wealth proceeds, a corporate tax surcharge, an additional one-percent millionaires’ tax, and a small progressive payroll tax.
- After one year, congestion pricing in New York City has proven to be a revenue and quality of life success. The tolls have generated an estimated $550 million for transit and resulted in 27 million fewer car trips.
- The Kentucky Center for Economic Policy covers how voters feel about the state’s recent tax cuts. Only 9 percent of Kentuckians indicated they feel the cuts have helped them personally; 72 percent reported that lawmakers should focus on “improving schools, improving healthcare, and bringing down the cost of living.”
- In a recent work by Good Jobs First, the group identified state revenue loss from data center subsidies. Virginia has forgone $1.6 billion in fiscal year 2025; Georgia $474 million in 2025, increasing to $625 million in 2026; and Illinois has halted their revenue loss disclosure from the state’s data center tax break.
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