The effects of last year’s federal tax and spending cuts continue to ripple through the states. Colorado leaders moved a step closer to responsibly decoupling from costly federal tax cuts for businesses to instead provide assistance to families with young children, while Michigan lawmakers tried and failed to increase “sin taxes” to fill the $800 million gap Congress created in their Medicaid program, and Arizona legislators were sent back to the drawing board by Gov. Katie Hobbs as she vetoed their most recent attempt to adopt all of the regressive federal tax cuts while slashing public services by 5 percent.
And with gas prices soaring due to the Iran war, leaders in Indiana, Kentucky, and Ohio are all attempting to provide a bit of relief in the form of gas tax reductions and suspensions.
In other news, Arkansas lawmakers – in a special session – enacted regressive income tax cuts for the fourth time under Gov. Sarah Huckabee Sanders, New York leaders appear poised to enact a tax on multimillion-dollar second homes, Iowa legislators passed a cap on property tax growth, and Washington’s new millionaires’ tax won its first legal battle.
Major State Tax Proposals and Developments
- Lawmakers in ARKANSAS concluded a three-day special session after passing $192 million in personal and corporate income tax cuts, which have since been signed by Gov. Sarah Huckabee Sanders – her fourth tax cut as governor. The legislation will cut the top personal income tax rate from 3.9 to 3.7 percent retroactive to January 2026 and the top corporate income tax rate from 4.3 to 4.1 percent beginning in 2027. An ITEP analysis of the legislation shows the wealthiest 1 percent (who have incomes upwards of $668,900) of Arkansans receiving an average annual tax cut of $2,729. The bottom 80 percent of Arkansans (with incomes under $132,000) will see an average annual tax cut of $71 or less. – NEVA BUTKUS
- The COLORADO House approved a package of bills that would decouple from federal business tax breaks to help fund a tax credit aimed at assisting households with young children. The package now heads to the Senate, where it is considered likely to pass. – MARCO GUZMAN
- CONNECTICUT lawmakers and Gov. Ned Lamont agreed to decouple from new federal tax breaks for factories and research, a prudent move particularly considering the state cannot focus the breaks on in-state investments. And while the fiscal 2027 budget did not include Gov. Lamont’s proposal to provide $200-per-person tax rebates or a cut to the state’s marginal income tax rates favored by Republicans, the bill does include a sales tax exemption on school supplies and an income tax credit for residents providing at-home care for relatives. – MARCO GUZMAN
- The IOWA legislature passed a measure to limit local property tax collections to a growth rate of 2 percent a year and increase the homestead exemption for seniors from $1,000 to $1,500. However, many property tax levies are exempt from the cap, including school funding and debt payments. The legislation also increases property taxes on multifamily homes, changes state authorizations for Tax Increment Financing districts, and makes other changes to the state’s property tax. – ELI BYERLY-DUKE
- The MICHIGAN Senate finalized its budget plan that ultimately did not include the $800 million in increased taxes on tobacco, vapes, and digital advertising to help offset federal Medicaid cuts. The Senate’s $88.1 billion budget is larger than the House’s $78 billion budget, and the state faces a July 1 deadline to complete final negotiations. – MILES TRINIDAD
- NEW YORK Gov. Kathy Hochul announced that she and legislative leaders have reached an informal agreement on the state budget. Details are not public yet but the deal includes some form of the “pied-à-terre tax” on multimillion-dollar second homes that Gov. Hochul and New York City Mayor Zohran Mamdani both support. It is unclear whether any of Mayor Mamdani’s other progressive tax increase proposals or other revenue measures are part of the package. – DYLAN GRUNDMAN O’NEILL
- The WASHINGTON Supreme Court rejected a challenge to a provision included within the newly enacted “millionaires’ tax” bill that exempts it from a public referendum. According to the state constitution, laws that are “necessary for the support of the state government and its existing public institutions” are exempt from referendums. – MARCO GUZMAN
State Roundup
- ALASKA legislative leaders are in the final stages of deciding whether to adopt a proposal that would subsidize the proposed trans-Alaska natural gas pipeline. Gov. Mike Dunleavy’s plan would cut state taxes by $7.2 billion over the next 36 years to incentivize construction. Meanwhile, the House subsidy would be less than $5.9 billion.
- ARIZONA Gov. Katie Hobbs once again vetoed a 16-bill budget package backed by Republicans. The package would have conformed to the tax provisions enacted in the 2025 federal tax bill and cut all state agency budgets by 5 percent.
- CALIFORNIA lawmakers advanced a worldwide combined reporting (WWCR) bill that would make the state the first to rein in corporate tax avoidance by requiring multinational corporations to fully account for their income no matter where it is located. We estimate this kind of profit-shifting is currently allowing companies to avoid $3 billion in California alone.
- INDIANA Gov. Mike Braun is extending his state’s suspension of its sales tax on gas for another 30 days, pausing the regular gas tax, and ordering a price-gouging investigation into gas sellers accused of doing so.
- KENTUCKY Gov. Andy Beshear is attempting to reduce gas taxes by declaring a state of emergency and issuing an executive order to reduce the rate by 10 cents per gallon and delay an inflationary increase (less than one cent per gallon) for one month. If approved by Attorney General Russell Coleman, the cut will be small and will not all make it to drivers.
- Local governments in MINNESOTA are weighing the costs of tax incentives for data centers.
- NEBRASKA is now officially the first state to implement new federal work requirements for Medicaid recipients. The state says it doesn’t need additional resources to do so, even though a similar effort in Georgia cost more than $50 million to administer.
- Education advocates in NEVADA are concerned about how the state’s restrictive school funding formula will perform if the economy sputters, calling for officials to consider new revenue sources, though the state’s next budget is in very early stages.
- A NEW JERSEY lawmaker has proposed an estimated $2 million in additional taxes on sales related to the World Cup as well as gambling on World Cup matches.
- OHIO Gov. Mike DeWine rejected a proposal from Republican lawmakers to temporarily suspend Ohio’s gas tax as prices increase due to the war in Iran. DeWine warned that suspending the tax would ultimately lead to deteriorating infrastructure and greater costs for Ohioans.
What We’re Reading
- Professor Craig S. Maher writes in Governing about how affordability issues affecting families also affect our schools and other public service providers. High gas prices and other spiking energy costs can affect our governments in systemic ways, but those institutions aren’t often prepared to predict and adapt to price issues as well as they are prepared to understand and respond to things like revenue fluctuations. Maher proposes several strategies to close that gap.
- ProPublica published an exposé of the Texas Governmental Accountability Association, an anti-government group. The group has, among other things, pushed for a small government model for localities while coercing cities like Odessa into signing agreements that stripped them of rulemaking authority.
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