As states lawmakers continue to weigh their linkages to the federal tax code in light of the recent federal tax law, New Mexico provides a blueprint for limiting multinational corporate tax avoidance. Recent legislation now signed into law prevents corporations from hiding their income in offshore tax havens while conforming to parts of the federal law, namely the federal code’s new definition of Net Controlled-Foreign-Corporation Tested Income (NCTI, or “necktie”). Other states would be wise to adopt this thoughtful, innovative approach to federal tax conformity.
Major State Tax Proposals and Developments
- NEW MEXICO Gov. Michelle Lujan Grisham signed the omnibus tax and budget bill into law, which decouples the state from provisions of the federal tax law including bonus depreciation, the new deduction for qualified property, and business interest. The state also conformed to the federal definition of NCTI which will help prevent corporate tax avoidance. – MARCO GUZMAN
- Earlier this year, HAWAI’I Gov. Josh Green proposed suspending income tax cuts that were passed in 2024 and are scheduled to phase in through 2031. The cuts, once fully phased in, are estimated to cost the state $1.8 billion annually. The House and Senate are now weighing differing approaches. The Senate plan would maintain tax cuts for individuals earning less than $175,000 annually, or $350,000 for joint filers. However, an advisor to Gov. Green expressed concern that the bill would not preserve enough tax revenue over the next several years. The House plan would preserve the standard deduction increases, repeal future tax bracket reductions for all taxpayers, and add a 1 percentage point surcharge on the state’s three highest brackets in 2027. – MILES TRINIDAD
- SOUTH DAKOTA Gov. Larry Rhoden signed legislation that will increase the state sales tax and allow local governments to levy new sales taxes to be used for property tax reduction. The first bill, which was initially proposed by the governor, allows counties to levy up to a half-percent sales tax to offset property taxes for owner-occupied homes. The other bill would allow the state sales tax to increase from 4.2 percent to 4.5 percent, as lawmakers scheduled it to do when it was temporarily lowered three years ago, and use the estimated $114 million in additional revenue to lower school district property taxes through the state’s education funding formula. – MILES TRINIDAD
- WEST VIRGINIA lawmakers gave final approval to a budget which includes a 5 percent cut to income tax rates at a cost of about $125 million. These cuts will accelerate existing triggers that will eventually fully eliminate the state’s personal income tax. Meanwhile, the state is struggling to keep its employees’ health insurance fund solvent. Although many, including Gov. Morrisey, made teacher pay raises a priority, the eventual increase was only 3 percent. – ELI BYERLY-DUKE
State Roundup
- CONNECTICUT lawmakers introduced a bill that would add a two-cent-per-ounce tax on sugary, sweetened beverages to fund universal free school meals for public school students.
- The FLORIDA legislative session ended with lawmakers failing to pass a budget or additional property tax cuts. The property tax cut debate became gridlocked as lawmakers, often within the same party, struggled to come to an agreement on how to best deliver property tax relief and how big tax cuts should be as cities and municipalities rang the alarm on how cuts could devastate their budgets and their ability to fund basic public services.
- Facing ongoing revenue uncertainties, IDAHO Gov. Brad Little signed into law a bill that cuts funding for most state agencies and departments by 4 percent in fiscal year 2026. Lawmakers plan to make an additional 5 percent cut in fiscal year 2027 to help fund conforming to tax cuts from the federal tax law.
- During last year’s budget negotiation, Chicago, ILLINOIS, adopted a first-of-its-kind social media tax on platforms with more than 100,000 users. Now the tax is being challenged in court by a tech industry group that argues the tax is a violation of the First Amendment.
- In the face of a roughly $600 million shortfall in funding for their Medicaid program, IOWA lawmakers advanced a provision to temporarily increase taxes on Health Maintenance Organizations from 0.925 percent to 3.5 percent, after which they would remain slightly elevated at 0.95 percent. The measure would also transfer about $300 million from a fund to temporarily offset tax cuts to Medicaid.
- KENTUCKY will participate in the new federal education scholarship tax credit program after the legislature overrode Gov. Andy Beshear’s veto of the measure.
- LOUISIANA lawmakers threw cold water on Gov. Jeff Landry’s call to eliminate the state income tax this year, calling for members to be extremely cautious with any bills that would lower revenues as the state stares down a revenue shortfall for 2026-2027.
- Three revenue-raising bills are back up for discussion in MAINE, including a bill that would create a “millionaire’s tax,” add higher marginal income tax rates, and increase the tax rate on corporations.
- The MARYLAND Senate passed a preliminary budget that aims to address a $1.5 billion structural deficit without new taxes or fees. The plan relies on one-time budget transfers, including $300 million diverted from the Strategic Energy Investment Fund. Lawmakers also narrowly failed to repeal a one-year-old surcharge on IT and data services that has fallen short of projected revenue. The surcharge collected $35 million when it was originally estimated to raise $500 million as part of a package last year to close a $3.3 billion budget gap.
- A MICHIGAN ballot initiative, known as Invest in MI Kids, to establish a tax on high-income households has suspended efforts to collect signatures for the upcoming November election. The proposal would have created a 5 percent surcharge on individuals earning more than $500,000 per year or $1 million for joint filers, which would have raised an estimated $1.6 billion for K-12 education. The effort is expected to come back in 2027 with the goal of getting on the 2028 ballot.
- Gov. Tim Walz of MINNESOTA proposed a new social media tax on tech companies that host more than 100,000 Minnesotans on their platform.
- NEBRASKA lawmakers continue to debate a wide assortment of changes intended to close their $646 million revenue shortfall, of which around $140 million remains after initial funding cuts and fund sweeps proposed by the Appropriations Committee. A combination of further cuts and sweeps, plus about $40 million in revenue increases, could close the remaining gap, but it remains to be seen how lawmakers will reach consensus with only a week remaining before they must submit a balanced budget. An op-ed from a former lawmaker helpfully describes some of the harm that could be done if specific-purpose funds continue to be raided to balance the General Fund.
- The NEW YORK budget is due April 1, but lawmakers and Gov. Kathy Hochul seem to remain far apart on important components. Both houses of the legislature included progressive tax increases in their budget plans, but Gov. Hochul continues to generally oppose those measures while repeating exaggerated claims about millionaires fleeing the state if the policies were to pass.
- NORTH CAROLINA lawmakers are preparing to propose a constitutional amendment that would limit local authority by directing how much cities and counties can raise their property taxes. Another bill would limit property tax exemptions for affordable housing projects.
- An OREGON judge ruled that lawmakers were within their rights to move a ballot referendum on gas tax and fee increases to fund transportation priorities from the November general election to the May primary election.
- SOUTH CAROLINA lawmakers are scrambling to pass a conformity bill ahead of 2025 tax filings. The bill would temporarily conform to the federal tax changes, including the tipped and overtime income deductions and auto loan interest deduction, before decoupling for the 2026 tax year. But this temporary piggybacking of the federal tax code will cost the state nearly $290 million in 2025. When paired with the $309 million income tax cut and $259 million property tax cut for seniors that lawmakers also passed, these tax cuts would consume all new revenue and some of the state surplus for 2026-2027.
- A former SOUTH DAKOTA state senator is leading a petition to place a proposal to abolish property taxes on the state ballot. The measure would replace lost revenue with a new sales tax. The group would need 35,000 signatures to make the ballot.
- UTAH Gov. Spencer Cox has several tax bills on his desk awaiting signature, including an income tax cut (both individual and corporate) from 4.5 percent to 4.45 percent, an expansion to the Child Tax Credit that slightly increases income eligibility thresholds, a digital ads tax, a cigarette tax increase, and a gas tax cut from 38 cents per gallon to 32 cents.
What We’re Reading
- Stateline reports on recent efforts by state lawmakers to pass sales tax increases to fund income and property tax cuts. This move doubles down on the most regressive form of revenue to fund government, shifting the funding of core services onto low-income and working-class families.
- A recent New York Times piece explores how Idaho’s new $50 million private school tuition tax credit is affecting public schools. It finds that the credit, combined with persistent tax cuts and recent federal-state tax conformity decisions, has forced some rural schools to cut back on programs benefitting Idaho students.
- The New York Times reports on the confusion and frustration surrounding “no tax on overtime” for workers.
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