State and local tax policy: 2024 preview

ARTICLE | January 12, 2024

Authored by RSM US LLP

Executive summary

Elections, economic uncertainty and lingering issues shape 2024 state and local tax policy

State and local tax policy outcomes in 2024 are especially difficult to predict because major variables remain unknown. This presidential election year will feature numerous races for state executive and legislative offices. The economy may not be marked by inflation as it was in 2023, but labor markets remain tight and interest rates are elevated by recent historical standards. And lingering issues—such as pass-through entity elections and taxes on the digital economy—are priorities for some states. Taxpayers should consult with their state and local tax advisors to keep abreast of and plan for possible tax law changes that could affect them.

State and local tax policy: 2024 preview

The state and local tax policy landscape for 2024 emerges

With a presidential election in 2024 headlining a significant year for state elections, will state tax policy continue the slow and steady tax cuts of the last few years, or will states play it safe and look to shore up revenue? Will economic conditions clarify, or will the bears be proven right by a downturn?

Too many unknowns make predicting the state and local tax environment as difficult as ever. But that doesn’t deter us in this analysis of what we expect as state sessions begin.

2024 state and local tax policy preview

The 2024 state and local tax policy outlook begins with the 2023 state election cycle, which featured few—but important—races in state legislative and executive branches. On the ballot were gubernatorial races in Kentucky, Louisiana and Mississippi. Incumbent governors ran in two of the three states.

In Kentucky, Democratic Gov. Andy Beshear won a second term, as did Mississippi Republican Gov. Tate Reeves. Democrat Gov. John Bel Edwards was term-limited in Louisiana, and Republican Jeff Landry won the seat for the new term.

All three states begin 2024 with veto-proof Republican majorities, likely securing unincumbered tax policy runways in Louisiana and Mississippi. Gov. Beshear, previously overridden on tax policy, will need to identify compromise to advance his tax policy agenda in the commonwealth.

State legislative elections were held in Louisiana, Mississippi, New Jersey and Virginia. Noteworthy changes occurred in Virginia, where Democrats managed to flip the House and hold onto the Senate for the next session. Virginia Gov. Glenn Youngkin may have difficulty executing on his stated tax cut goals with the new legislature.

All but four state legislatures will meet in 2024 with most states finishing up before June. Notably, state legislatures have historic uniformity, with one-party control in every state except Pennsylvania, where the Republicans control the Senate and the Democrats the House.

As the nation elects a president in November, state elections will garner more attention than they did in 2023. On the ballot will be 11 gubernatorial races, and more than 85% of all the state legislature seats are up for grabs.

An economy looking for an identity

State finances struggled with inflation in 2023. Although the labor market remained tight, the major indices rallied into year-end, and consumer spending remained strong.

In what may have been a post-pandemic revenue return to trend, most state taxes experienced major declines in growth. In calendar year quarters one and two, there were significant declines in personal income taxes and corporate income taxes, with states in the aggregate collecting less revenue than the same quarters the year before.

Sales taxes continued nominal growth, but experienced low, single-digit increases in quarters two and three. By the third quarter, personal income taxes seemingly were on track to slow the bleeding with a low, single-digit nominal decline year-over-year, and corporate income taxes and sales taxes growing under two percent.

The less volatile third quarter may be an indication that the wild revenue swings are over, but it will take further analysis and the holiday shopping season to judge the entire year. Rainy day fund expenditures and overall totals remained near historic highs, allowing the needed support if a minor downturn or recession were to occur.

What’s next for state tax policy?

Encouraging economic signs are present with inflation slowing, employment rising and interest rates expected to decrease later this year. With the possibility of a recession or downturn easing, states may not have to employ aggressive revenue generation measures as they begin work on fiscal year 2025 budgets.

There is little to indicate that states will substantially increase corporate and personal income tax rates or bases in the coming year. Dozens of states reduced those taxes over the past three years, and it is unlikely that states will reverse those policies.

While the possibility of a recession remains, many states are projecting budget surpluses; these are not, however, as large as in past years. Conversely, it is also unlikely that states will continue the dramatic corporate and personal income tax cuts.

As is usually the case, in the event states desire to raise more revenue, they are probably going to do so through consumption taxes. States continue to consider expanding sales taxation to digital goods and services and untaxed professional services. Many of the 45 states and the District of Columbia that impose sales taxes have already broadened the base to include various types of electronic products, although some have not done so extensively.

Consumption taxes have always been politically more palatable than income taxes. Some states will also likely expand excise taxes. Many states have raised meaningful revenue from taxes on marijuana and gambling; other states will probably join that trend.

Legislative and regulatory focuses in 2024 may include the following:

Public Law 86-272: The revised P.L. 86-272 guidance continued its slow march to adoption. New Jersey adopted the guidance earlier in the year, and the recent New York corporate regulations will generally follow the guidance.

Most notably, taxpayers received a win, albeit potentially a temporary win, when a California superior court found the state’s policy adoption of the new guidance an improper regulation—additional litigation is all but certain. We anticipate similar activity in 2024, but taxpayers should be prepared and understand the new Multistate Tax Commission guidance. Virtually all states that tax income are examining the possibility of adopting the MTC guidance. We anticipate litigation as states pursue policies that will limit the reach of P.L. 86-272.

Pass-through entity tax elections: Few states remain without a pass-through entity tax election, including the District of Columbia, Delaware, Maine, North Dakota, Pennsylvania and Vermont. We believe there will be legislative proposals in these states in the coming year.

Most of the state elections are not connected to the federal sunset after 2025. Depending on Congress, the state and local tax deduction limitation may be altered or preserved before the scheduled sunset. Pass-through entities considering the election should carefully model the impact before electing. 

Digital economy: With the crash of the non-fungible token (NFT) market in late 2022 and little guidance on cryptocurrencies from the federal government, 2023 was a quiet year for states addressing digital assets. The states are likely eager to act to ensure compliance with cryptocurrency reporting.

Separately, digital goods and services taxation remained a talking point, with New Mexico adopting digital advertising taxation rules, and the Maryland Supreme Court reinstating the tax after an early challenge in the first state to adopt such a tax. Several of those taxpayers have now appealed to the Maryland Tax Court following administrative appeals paving the way for a substantive decision on the merits of the Maryland tax.

Other noteworthy proposals discussed in 2023 include social media taxes and data mining taxes. The digital economy will remain a target for state tax bases as consumers increase spending on digital services.

Local taxes: Local taxing jurisdictions continue to struggle post-pandemic as offices in city centers emptied and hybrid workforces took over in many white-collar industries. The flexibility for workers also increased relocation out of urban centers for lower cost-of-living environments. In many instances, these developments have resulted in lower property tax revenue collections particularly with respect to commercial real estate.

Localities will be looking for unique and creative ways to generate revenue. Included in some proposals have been payroll and wage taxes (generally unpopular), incentives for conversion of office real estate to apartments, and incentives for remote workers.

Moore v. United States: Could the federal challenge to the Tax Cuts and Jobs Act’s transition tax upend state revenues? Although most states do not derive significant revenue from taxing section 965 income, the state impact will depend on how the U.S. Supreme Court decides and will likely be unknown until the end of June. However, the decision could affect how states tax and apportion foreign income. Notably, the decision will likely be issued after most state sessions have ended for the year.

It will be imperative to follow state tax policy developments both legislatively and administratively. Tax proposals can move quickly in some states, especially with shorter legislative sessions, catching unprepared taxpayers off-guard.

How federal tax reform in 2024 could impact state tax policy

Taxpayers watched Congress closely in 2023 only to be disappointed by inaction on major and often bipartisan tax issues such as, among others, immediate expensing for research and development (section 174), immediate expensing for capital equipment, restoration of earnings before interest, taxes, depreciation and amortization (EBITDA) over earnings before interest and taxes (EBIT) for the 30% business interest deduction limitation, and extension or amendment to the state and local tax deduction limitation.

Additionally, many taxpayers may be looking ahead to the numerous individual and pass-through provisions expiring after 2025, including the increase in the estate and gift tax exemption, the qualified business income deduction (section 199A), tax rates, the standard deduction, itemized deductions, the alternative minimum tax (AMT) and the child tax credit.

With the presidential election in November, the likelihood of a major tax bill addressing the items listed or many other tax concerns decreases with time as members consider their own races. State taxpayers should remain vigilant early in 2024 for tax bills that could impact state and local tax footprints, but they may have to wait until 2025 for more comprehensive legislation addressing many of the expiring provisions.

Takeaways

The new year will feature many gubernatorial and legislation elections. While incumbents and challengers will discuss tax policy on the campaign trail, state election years do not usually result in dramatic tax policy changes. That being said, tax proposals made during election season often become policy in subsequent years. Taxpayers should monitor tax issues discussed in campaigns in states in which they have significant business activities.

While broad tax reform is unlikely in 2024, less politically visible issues such as P.L. 86-272 and digital advertising taxation will remain significant issues, especially on the regulatory side. The key, of course, is being aware of potential statutory and regulatory tax policy changes, including rate increases and base expansion.

Taxpayers should consult with their state and local tax advisors to keep abreast of—and plan for—possible changes. Consider our 2023 year-end planning guide for opportunities in 2024.

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This article was written by Brian Kirkell, David Brunori, Mo Bell-Jacobs, Amy Letourneau and originally appeared on 2024-01-12.
2022 RSM US LLP. All rights reserved.
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