As we head into summer, many state legislatures are in the final stretches of their sessions. Rhode Island moved another step closer to joining the ranks of Washington, Maine, and Hawai’i in enacting a new high-income surcharge this year. The legislation, which not only includes a millionaires’ tax, but also the state’s first permanent refundable child tax credit and strategic decoupling from federal tax provisions to protect state revenue, now heads to Gov. Dan McKee’s desk. If approved, Rhode Island will join Maine, Oregon, Illinois, and Vermont in decoupling from the monster known as QSBS, an increasingly costly tax break that allows millionaire investors to pay zero income tax on their profits.
Major State Tax Proposals and Developments
- The Senate in RHODE ISLAND passed a budget that includes a new phased-in surtax on high-income households, a new refundable child tax credit, and federal conformity decisions that will protect state revenue from federal action. The budget now heads to Gov. Dan McKee who echoed many of these policies in his initial budget proposal. If approved, the bill would gradually phase in a 3 percent surtax on annual income over $1 million, raising an estimated $142 million a year once fully implemented. The new child tax credit would provide a $330 per child credit that will begin to phase out at $88,500 for single filers and $110,640 for joint filers, while keeping the current dependent exemption unchanged. The budget also decouples the state from federal corporate tax deductions for QSBS and the business interest limitation. Lawmakers also eliminated the age requirement that limited the Social Security income exemption from income taxes. – MILES TRINIDAD
- The MASSACHUSETTS House and Senate have agreed, in principle, on a budget deal for the state that includes phasing in conformity to federal corporate income tax cuts that were included in Trump’s 2025 tax bill. The agreement would halt the phase-in if the state adopts a ballot measure aiming to cut the state’s income tax by 1 percentage point. – ELI BYERLY-DUKE
- ARIZONA lawmakers and Gov. Katie Hobbs have reached a budget deal. It includes broad conformity to many of the tax cuts implemented in the 2025 federal tax law – including those for tips, overtime, dependent care expenses, research expenses, “qualified small business stock,” and others, but not the expanded SALT cap (after 2025) or qualified production property – and adds some state-specific tax cuts such as a $25 increase to the dependent tax credit. The budget also adds new barriers to receiving Medicaid and nutrition assistance (SNAP) benefits and includes a three-year moratorium on sales tax exemptions for data centers. –NEVA BUTKUS
State Roundup
- The DISTRICT OF COLUMBIA Council voted to advance its 2027 budget that would extend decoupling from the federal tax law for the standard deduction, limitation on itemized charitable contributions, increase for deductible business interest expenses, and increase in business depreciation through 2029, which is estimated to generate an additional $180 million a year. The extension comes after Congress voted to bar the city from moving forward with its decoupling changes that were passed for 2025 but has had no effect due to a technicality argued by the city. The budget leaves in place the federal tax provisions affecting seniors and tipped workers. The budget also includes an amendment to the treatment of D.C. residents’ unincorporated business income that would make it more progressive and raise more revenue.
- GEORGIA’s gas tax suspension ended after being in place since March. In May alone, the suspension cost the state nearly $200 million in revenue.
- ILLINOIS Gov. JB Pritzker suspended all new tax incentives for data centers and is calling on legislators to reform the existing incentives this fall. The existing incentives cost the state $983 million from 2020 to 2024.
- Tax breaks for data centers are also a hot topic in the KANSAS gubernatorial race, with candidates on both sides of the aisle calling for a moratorium.
- KENTUCKY Gov. Andy Beshear extended the state’s reduction in its gas tax for 33 cities and counties through the end of June.
- MONTANA State Sen. Wylie Galt suspended his campaign to cap local government property tax collections by ballot initiative in the face of mounting pushback. The state has already recently cut property taxes and may attempt to do so again via regular legislative process.
- MICHIGAN’s new marijuana wholesale tax fell short of revenue expectations. The new 24 percent tax was estimated to generate $420 million a year in additional revenue for road funding, but it has only raised about $34 million in the first four months of the year, roughly $70 million less than the $105 million expected. However, the shortfall is not anticipated to affect road funding as the gap will be filled with revenue from the general fund.
- The NORTH CAROLINA legislature gave final approval to a bill that would delay the use of new property tax values in counties that conducted 2026 reappraisals. While lawmakers passed the bill to rein in property tax increases, some lawmakers are warning that the bill is a short-term attempt to address property value increases that would cost local governments funding for schools, public services, and other local services.
- The PENNSYLVANIA House passed legislation creating a 5 percent gross receipts tax for online advertising, which is estimated to raise $500 million per year. While the revenue would have gone to the general fund, an amendment to the bill would divert the revenue to give senior citizens a rebate on their school property tax bills.
- Tax negotiations in Philadelphia, PENNSYLVANIA were derailed amid opposition from city council and concerns from the statehouse. Mayor Cherelle Parker proposed a $1 per ride charge on rideshares, as well as increasing taxes on short-term rentals. The current budget reflects no change in tax rates. Lawmakers in the statehouse have put forth a proposal to close the sales tax loophole for online sellers, which does not require sellers to collect local sales taxes. ITEP’s Rita Jefferson wrote about the potential of the city’s budget to benefit all residents and the broader community in a recent op-ed.
- WASHINGTON Gov. Bob Ferguson is warning agency directors that the state’s next budget is likely to be a difficult one. Revenues are not keeping pace with funding needs and recently enacted tax policies will take time to materialize new revenue for funding needs.
- Estimates in WYOMING show that a proposal to exempt half of the valuation of residential property from the state’s property tax would cost the state about $125 million a year. The state estimates this would translate to cuts to school funding alone of about $80 million.
What We’re Reading
- A new article by Cristobal Young, the renowned researcher and scholar of millionaire tax flight, brings evidence to bear against the common, often exaggerated claim that the ultra-rich leave when states and localities increase taxes.
- The New York Times examines free parking in New York City, with potential policy changes like increased number of meters, paid permit parking for residents, and changes in parking enforcement.
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