Elections & Campaigns, Tax & Budgets
Here Are the Tax Policy Implications of the 2023 State Elections
November 21, 2023 | Ryan Maness
As we noted in a previous article, when Democrats have trifecta control over the levers of power in a state, they are significantly more likely to enact policies to increase state revenues (compared to Republicans and divided governments). This fact has particular relevance for 2023, as Democrats secured four new trifectas in Maryland, Massachusetts, Michigan, and Minnesota. In this report, we will be looking at what kinds of policies these four states might pursue in the coming legislative session.
In order to predict what tax policies these newly empowered Democratic caucuses might introduce, we reviewed their legislative history to see which legislative ideas were repeatedly introduced but were not enacted under a divided government.
We expect Maryland Democrats to pursue new taxes on the technology sector following the judicial defeat of the digital advertising tax (pending appeal) and to give serious consideration to mandatory unitary combined reporting proposal. Massachusetts lawmakers' long-standing interest in “modernizing” the tax code to include more digital services in the sales tax base and their drive to use the tax code to achieve environmental reforms should push their agenda, though voters’ approval of a “millionaires tax” could blunt those efforts. Michigan Governor Whitmer (D) has been pushing for additional road funding for several years and that will likely continue in 2023, though a gas tax hike is unlikely. Finally, in Minnesota efforts to reform the education system could require significant new revenues and procedural changes could widen the kinds of policies that make it into the state budget.
One of Maryland Democrats’ landmark accomplishments in recent years is an education reform package passed in 2021 over Governor Larry Hogan’s (R) veto. Expected to cost billions of dollars over the decade, the legislature passed a slate of tax increases (HB 732) to pay for these reforms, including an increase to the cigarette tax and a first-of-its-kind tax on digital advertising. Official state estimates predicted that the new ad tax would raise $250 million per year. But in October, the promise of those dollars vanished — at least for now — when a Maryland court struck down the ad tax for violating the Internet Tax Freedom Act and the U.S. Constitution. State officials have said that they will appeal this ruling, but they seem unlikely to prevail, which would leave them in the difficult position of having celebrated a heralded achievement that they now can’t pay for. It’s possible they could abandon the entire enterprise, but with Wes Moore (D) now in the governor’s mansion it seems more likely that they will try to replace those revenues with something else.
Apart from the millions of dollars it was supposed to generate, a key selling point of the digital advertising tax was the belief that it would allow state governments to exert some control over “Big Tech.” This ancillary benefit was likely one of the reasons Democrats were willing to tie their education reform to a new, untested tax policy. Following the ad tax’s setback, Democrats may try to find a different tech-focused tax. It is worth noting, though, that they already levied taxes against more “traditional” areas of the tech sector in 2020 when they expanded the sales tax base to a number of digital goods and streaming services (HB 932/SB 1001). It’s hard to know what new idea they might pursue, but a tax on data like the one introduced in New York (AB 6199/SB 4959) is possible.
Additionally, a perennial fiscal target for certain state Democrats has been to mandate unitary combined reporting for the corporate income tax. Lawmakers have introduced this policy 21 times since 2016, including twice during this year’s session (HB 457 and SB 360). While no fiscal estimate suggests that combined reporting could come close to bringing in as much money as the dormant digital ad tax, it seems very likely to be in the conversation next year.
The defining tax debate of Governor Charlie Baker’s (R) tenure of his office has been whether Massachusetts would implement accelerated or “real-time” sales tax remittance, but Democrats have also been working on their own consumption tax agenda. Since 2017, the legislature has debated more than 160 different sales tax proposals, which is roughly double the number of corporate income tax or property tax bills from the same period.
These efforts had a particular focus on levying new taxes on the digital economy. In 2019 Senate President Karen Spilka (D) said that modernizing the state’s tax code to account for new technologies was necessary to provide support for the commonwealth’s essential services. Since then lawmakers have introduced bills to tax streaming entertainment (HB 4045), the sales of personal data (SB 1938), and digital advertising (including HB 2894, HB 3081, and HB 4042). Given what happened in Maryland, it is less likely that legislators in Boston will continue down the path of taxing digital advertising, but there are indications that they will continue to consider new ways to impose taxes on the technology sector.
While less directly fiscally focused, efforts to combat climate change have also long been a major part of Massachusetts Democrats’ core agenda and will likely continue to play a leading role after Governor Baker’s departure. Between 2017 and 2020, the commonwealth was among the states that introduced the most carbon tax bills (nine in total, including HB 5198, SB 1924, and HB 2802). Like in most states, this interest in having the government place a direct price on carbon emissions faded, but the overall interest has remained, with Democrats getting into a showdown with the governor this year over their marquee environmental proposal (HB 5060). That bill ultimately became law, but Democrats were forced to make some concessions. Given this history, it would not be surprising if Democrats redoubled their environmental efforts now that they have a governor from their own party.
The political conditions necessary for lawmakers to try to “modernize” the tax code or pass environmental tax policy could be complicated after voters approved Question 1 in November, which levies a new four percent tax for personal annual incomes over $1 million. Revenue estimates vary, but most predict the new tax will bring in over $1 billion per year. This would make it one of the largest tax increases in commonwealth history and, as we’ve discussed previously, an abundance of new revenue can make passing new tax packages more politically difficult. The full effect that this new personal tax will have on Boston lawmakers remains to be seen, but it could be a countervailing force against any other potential tax hike.
In 2019, Governor Gretchen Whitmer (D) included a 45-cent increase in the gas tax in her budget proposal as part of her pledge to “fix the damn roads.” It was an aggressive plan and the Republicans who held control of the legislature at the time pushed back. This resulted in a budget stalemate that lasted for months, with the governor vetoing a budget she said had inadequate funding for transportation. As a result of budget negotiations, the state did not have an approved spending plan until December. Since then Governor Whitmer has not renewed her attempt to hike the gas tax, but she has spoken frequently about the need for new revenue to repair her state’s infrastructure systems.
Given the pushback she received in 2019 and the overall political climate of the moment, it seems unlikely that the governor will push for a major gas tax increase, but she will almost certainly work for some kind of new revenue package. Governor Whitmer has said that ”an entirely new approach" is necessary to shore up the state’s transportation system, particularly given the growth in the electric vehicle market. Whether lawmakers might pursue new mileage fees, higher registration fees, or something else is still unclear, likely because the legislators themselves haven’t settled on an approach yet.
There have been a few other fiscal legislative priorities that Democrats have focused on in the last few years that could suggest where they might go in the future. A bipartisan coalition of lawmakers is currently pushing a proposal (SB 417) to increase the Earned Income Tax Credit from 6 percent to 10 percent by 2024 during the lame duck session; if that effort fails it will very likely be renewed during the 2023 regular session. Additionally, in the current biennial session Democratic lawmakers proposed four different bills (HB 5032, HB 5034, HB 5039, and SB 514) aimed at expanding access to broadband, so we can expect this topic to recur again as well.
Governor Tim Walz (D) has already said that education funding reform will be a top priority in 2023. As we saw in Maryland in 2020, education reform can be an expensive endeavor depending on how aggressive lawmakers want to be. Current indications are that they plan to utilize existing state funds, but new revenues are not out of the question. As of this writing, we don’t know exactly how far the governor is planning to go or how legislators might react. The most concrete fiscal idea currently being floated is to reduce state education funding’s reliance on the property tax, but that could either mean establishing a new revenue stream or diverting money from the state’s estimated $17.6 billion budget surplus.
Legislative leaders haven’t said much about their fiscal priorities in the new year, but the bill history of some soon-to-be empowered committee chairs can give us some ideas. Senator Ann Rest (D), the new presumptive chair of the Senate Tax Committee, has sponsored two carbon tax proposals (SF 4207 and SF 51) and two bills to repeal the corporate minimum tax (SF 345 and SF 2598). Senator John Marty (D), the new presumptive chair of the Senate Finance Committee, has introduced three bills (SF 2700, SF 1977, and SF 3318) targeting so-called “tax havens” since 2015.
While there is an opportunity for substantive policy developments in Minnesota moving forward, there are also going to be major procedural changes that could also have a significant impact. Minnesota utilizes tax omnibus bills as part of its fiscal planning and these pieces of legislation are often crafted with limited public visibility, filled with last-minute proposals, and passed quickly. These bills, which can be hundreds of pages long, often incorporate language from numerous other bills introduced earlier in the session — but that may have seemingly languished in committee — often making the final policy composition a grab bag of surprises.
In times of divided government, the legislature could move from introduction to enactment of these important omnibus bills even quicker than in previous years. There may be less pushback during the closed-door negotiations, allowing for a wider range of proposals to make it into the legislation, and fewer opposition votes. We’ve pointed out before that trifectas tend to pass more impactful legislation and faster than divided government and that dynamic could achieve its apex under Democrat’s unified control of Minnesota.
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