States across the nation are reckoning with their tightening fiscal futures as inflation and economic woes continue to eat into their budgets. In the face of these headwinds, including rising gas prices, some have proposed freezing gas taxes in Massachusetts and Ohio, although both states would struggle to afford the freeze. Meanwhile, D.C. is considering many new progressive revenue increases and Nebraska attempts to ignore its own growing fiscal problems.
Elsewhere, the federal government continues a streak of immigration-related proposals to change the tax system, with real impacts on our communities and state’s bottom lines. On the heels of an illegal effort to share IRS data with immigration enforcement authorities and an ongoing attempt to make many lawfully present immigrants ineligible for many federal credits, the IRS is now circulating draft tax forms that would ask filers about their immigration status.
Major State Tax Proposals and Developments
- Faced with a weakening economic outlook following federal job losses due to DOGE, the Council in the DISTRICT OF COLUMBIA is considering tax increases to fund core services and the increased costs of education, healthcare, and other city programs. The proposals include a range of progressive revenue options, including: a pied-à-terre tax on high-value homes exceeding $2.558 million, a net investment income tax on individuals with incomes over $400,000 ($500,000 joint), an increase to the income tax rate for taxable incomes exceeding $250,000, a new business activity tax, and an assessment change that would enable the District to possibly pursue a land value tax in the future. It also includes more regressive options, such as an increase in the District’s sales tax from 6 to 7 percent and slight increases to property tax rates. – MILES TRINIDAD
- The IRS has released a draft tax form that includes a new and unprecedented question asking if the filer is lawfully present in the U.S. This is widely expected to lead to a chilling effect on tax filing among immigrants wary of their answer to this question being used against them in immigration enforcement actions. While the federal tax code restricts use of tax returns for law enforcement, the IRS illegally shared data with federal immigration enforcement officials earlier this year in a move that prompted numerous resignations and a so-far successful court challenge. – MILES TRINIDAD
State Roundup
- Gubernatorial candidates on both sides of the aisle have come out in support of eliminating ALABAMA’s grocery sales tax this campaign season. State lawmakers reduced the sales tax on groceries from 4 to 2 percent over the past three years, which is where it remains today.
- The new digital advertising and social media taxes passed by ILLINOIS lawmakers face litigation claiming that they violate the Internet Tax Freedom Act.
- MARYLAND officials are appealing a state tax court ruling that struck down the first-of-its-kind digital ad tax intended to fund state education reforms. ITEP has weighed in on other states considering similar legislation.
- MASSACHUSETTS Gov. Maura Healey proposed freezing the state’s gas tax. State legislative leaders are skeptical, with some saying the state can’t afford the roughly $120 million annual revenue loss. Meanwhile, in-state tax experts make the case for progressive tax options in the Bay State with a new report and toolkit.
- NEBRASKA lawmakers are preparing for a legislative session in which they’ll have to fill another shortfall. Just before the state’s revenue forecasting board is set to estimate the size of the problem, Gov. Jim Pillen has replaced one-third of that board with his own political allies – including the former Revenue Committee chairperson who led the state’s extensive income tax cutting effort and is already on record denying there is any shortfall at all. Many in the state are understandably concerned about this politicization of what is meant to be a nonpartisan independent board. Meanwhile, the focus on tax cuts has driven up fees across the state as agencies and localities attempt to provide services amid high inflation and dwindling state funding.
- OHIO lawmakers could potentially return to the statehouse, interrupting their election-season recess, to suspend the state’s gas tax. The announcement came from Republican gubernatorial candidate Vivek Ramaswamy, whose running mate is president of the Ohio Senate and has control of the chamber’s legislative agenda. The announcement came a few hours after Democratic candidate Amy Acton also called to suspend the state’s gas tax. It’s unclear how Gov. Mike DeWine would respond.
What We’re Reading
- The Atlantic discusses the wave of property tax cuts and impacts to state and local budgets while Stateline explores the impact of tax measures on state ballots this fall (we wrote about the latter earlier this month).
- The Missouri Budget Project lays out the proposed sovereign wealth fund that would be authorized by Amendment 7. Although the goal would be to use proceeds of the fund to eliminate all state taxes (yes, all of them) the measure has no dedicated funding and will likely struggle to acquire the many hundreds of billions necessary to accomplish even part of its goal.
- A recent piece by the Kentucky Center for Economic Policy explains the implications of property tax assessment caps and lays out the stronger alternatives available to the state, including circuit breakers.
- The enormous tax breaks given to data centers in West Virginia are following repeated patterns of the state’s extractive industries, according to Kelly Allen of the West Virginia Center on Budget and Policy. Although companies do not identify taxes as a major factor in location, the state has given away enormous tax breaks without using the companies to spur investment in residents.
- The Institute for Policy Studies provides suggestions for what Indianapolis could fund with the $395 million of tax breaks given to big tech companies for data centers.
