State Rundown 3/26: Lawmakers Navigate Shortfalls, Potholes, and Pitfalls

State lawmakers around the country are navigating a range of potential hazards this week. Leaders in Maryland and Washington are facing budget holes but are smartly working to get out of them through progressive taxes on those with the most ability to pay. Both North Dakota and Washington state are looking to fill literal potholes via gas tax updates. New Mexico legislators made strides in improving lives of middle- and low-income families through a revamped refundable tax credit. Some policymakers in South Carolina have unfortunately already fallen for the myth that slashing top income tax rates is good for state economies. And Mississippi lawmakers almost really stepped in it by inadvertently enacting a rapid elimination of their income tax.

Major State Tax Proposals and Developments

• The NEW MEXICO legislature reached a compromise in their tax debate and will replace their Working Families Tax Credit with a state Earned Income Tax Credit, which will expand eligibility and increase the rate from 25 to 34 percent of the federal credit. The package will also raise liquor taxes for a tribal alcohol alleviation fund, create a credit for foster parents and guardians, and remove medical services from the gross receipts tax. A new tax on oil that would have paid for these changes on an ongoing basis at a very low rate (0.28 percent) was scuttled late in the negotiations, so lawmakers will draw $113 million from reserves to fund the first-year cuts instead. – MARCO GUZMAN 
• SOUTH CAROLINA Gov. Henry McMaster and GOP leaders have announced their plan to collapse the state’s three brackets – with a current top rate of 6.2 percent –to a flat 3.99 percent personal income tax rate starting in 2026. The rate then has the potential to trigger down to 2.49 percent, totaling $2.7 billion in lost revenue. A major component of the tax cut plan also shifts the starting point for South Carolina’s tax returns from federal taxable income to federal adjusted gross income, meaning home mortgage interest, property taxes, and certain deductions and exemptions will be added back to a household’s income and taxed. – NEVA BUTKUS 
• WASHINGTON legislative leaders are making an earnest effort to address their revenue shortfall and upside-down tax code at the same time, proposing several tax changes with the intention of bringing in more revenue from the high-income households that currently enjoy some of the lowest taxes in the nation. Specific proposals include a new tax on financial assets exceeding $50 million, applying state payroll taxes to higher incomes, removing some tax preferences, allowing property taxes to grow beyond an existing arbitrary 1 percent cap, and reducing the state sales tax. Both houses are also discussing gas tax increases to fill a hole in the state’s transportation budget. – DYLAN GRUNDMAN O’NEILL

State Roundup

• Legislators in DELAWARE are considering amending the charter of Newark to allow the city to tax the University of Delaware per student. The university covers 40 percent of all land area in the city, all of which is exempt from property taxes.  
• Last year, GEORGIA voters created a property tax valuation cap that limits annual growth in assessments to the rate of inflation. It included an opt-out provision for municipalities, which would allow them to avoid being placed under the cap. Many taxing districts in Georgia opted out of this cap, including two-thirds of school districts. The legislature is now trying to force municipalities to abide by the cap by requiring them to hold another round of local referendums in 2027 to opt out or be placed under the cap by state law.  
• In their latest conversations around property tax cuts, IOWA lawmakers are debating a proposal to cap state property taxes used to fund schools. Although the measure initially backfills the revenue for local governments, the state has cut revenue enough that it may not be able to afford the continued expense. 
• Legislation in KANSAS would enact triggers on the state’s progressive personal and corporate income tax rates, ultimately resulting in a flat 4.5 percent rate for both taxes.  
• The LOUISIANA Supreme Court tossed out a lawsuit over the proposed Constitutional Amendment Two. The initial lawsuit claimed the amendment language – which is based on a 100-page legislative act – is misleading to voters. If passed, the amendment – which remains on the ballot – would constitutionally lower the maximum income tax rate in Louisiana from 4.75 to 3.75 percent.  
• The MARYLAND House of Delegates reached an initial agreement on a budget proposal that would raise $1 billion in new revenue in an effort to close a $3 billion deficit. The proposal includes two new brackets and rates for those earning over $500,000 and $1 million, a 2 percent tax on capital gains income for those earning over $350,000, a new sales tax on data and IT services, and tax increases for sports betting and cannabis sales. 
• Lawmakers in MISSISSIPPI are likely to restart negotiations on broad tax cut proposal after the Senate sent the House a compromise bill with misplaced decimals that would have unintentionally triggered down and phased out the state’s personal income tax at a rapid rate. While the House initially passed the typo-ridden legislation, they are now willing to come back to the table but will likely use this as leverage to force the Senate’s hand on fast income tax cuts and changes to the Public Employees Retirement System. 
• Debates continue in MISSOURI around a proposal to boost a tax credit for donations to anti-abortion centers to 100 percent. Because the proposal includes donations of corporate stock, many investors could see greater than 100 percent returns for their donations.  
• NORTH DAKOTA lawmakers introduced legislation to increase the gas tax for the first time in 20 years as well as an electric vehicle fee. The legislation would increase the gas tax by 3 cents per gallon to 26 cents and would raise EV registration fees from $120 to $150 per vehicle. The legislation is estimated to raise $42 million in biennial revenue for improving local roads. 
• A TENNESSEE Senate committee advanced a bill to raise about $16 million via a tax on vaping products in the state. The measure would also require vaping stores to register with the state. 
• UTAH Gov. Spencer Cox vetoed a bill that would have diverted property tax revenues from local public school funds to the state general fund. 

What We’re Reading

• ITEP published a breakdown of how to use tax policy to support affordable housing; spoiler alert – it’s not through broad tax cuts.  
• A recent ITEP blog pushes back against the notion that tip exemptions have any place in state income tax law.  
• Kyra Roby of Mississippi’s One Voice argued in Mississippi Today that income tax elimination is too expensive and inequitable and that lawmakers should focus instead on preserving revenue and making the state’s tax system more fair.  

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