This year states continued to enjoy unprecedented fiscal stability as tax revenues came in over expectations and federal COVID-19 relief dollars helped shore up state budgets.
Since most states were not experiencing any significant fiscal pressures, policymakers made targeted changes to the tax code, but few states tackled comprehensive tax reform.
On the docket this year in the business tax policy space were changes in corporate income tax apportionment, corporate income tax rate changes, and other administrative changes.
Looking ahead to 2024, we expect more normalized state budgets. The majority of states will continue to be in stable revenue positions, despite minor dips in revenue.
This article is part of our latest series: Major Issue Trends in 2023: State Legislative Recap. In this series, our experts examine the high-level legislative trends they saw in the 2023 state sessions. In addition to discussing the most prevalent issues considered by state policymakers, they explore some of the more surprising emerging trends we noticed, plus what to expect in 2024 for many of these policy areas. The series will be released during November and December, with new articles each week. Explore the full series here, and be sure to sign up for our email list so you don’t miss out on any articles (check the “Blog Posts” box).
This year states continued to enjoy unprecedented fiscal stability as tax revenues came in over expectations and federal COVID-19 relief dollars helped shore up state budgets. Since most states were not experiencing any significant fiscal pressures, policymakers made targeted changes to the tax code, but few states tackled comprehensive tax reform.
State Tax Policy Trends in 2023
Apportionment of Corporate Income Tax
For example, apportionment of the corporate income tax was an area of particular focus in 2023. Montana and Tennessee both passed bills (MT SB 124 and TN HB 323) moving their states to single sales factor apportionment formulas, while New Mexico (NM HB 547) and Kansas (KS HB 2110) almost adopted single sales factor bills, but those provisions ultimately failed.
Corporate Income Tax Rate Changes
There were successful efforts to cut the corporate income tax in Arkansas (AR SB 549) and Utah (UT HB 54). Both of these bills involved relatively minor cuts – they each reduced the rate by 0.2 percentage points. New York went in the other direction in its budget (NY SB 4009/AB 3009) to extend a 0.75% surcharge to the corporate income tax for certain large entities and also to extend the state’s capital base tax rate of 0.1875% through 2026.
Administrative Tax Changes
New Jersey, after extended negotiations between policymakers and taxpayer stakeholders, passed legislation (NJ SB 3737/AB 5323) with a number of administrative business tax changes. Generally, these changed the treatment of certain foreign income, established new standards for when taxpayers would be subject to state taxes, and changed corporate apportionment rules.
While many states made relatively minor or targeted changes to the tax code this year, a few states did tackle broader tax reform packages. Minnesota passed landmark tax legislation (MN HF 1938/SF 1811) this year as part of its omnibus process. While the headline policy change was that the state would begin taxing some foreign income, the package also levied new taxes on investment income, amended the requirements for solar incentive credits, and extended the film tax credit.
In late September, following the passage of their budget, Massachusetts legislators released and quickly passed their long-awaited tax omnibus bill (MA HB 4104). Negotiated behind closed doors, the bill implemented single sales factor apportionment, reduced the tax rate on short-term capital gains, and established a new cap on the estate tax.
Expect Normalized State Budgets in 2024
Looking ahead to 2024, there are questions about how tightening budgets will affect state debates on fiscal policy. Already New YorkandMaryland are staring down looming revenue shortfalls, which could spur lawmakers who have historically advocated for more aggressive tax policy proposals, such as new taxes on user dataandmandatory unitary combined reporting, respectively. However, the majority of states will continue to be in stable revenue positions, despite minor dips in revenue. The revenue collection of the last few years has been unprecedented and unsustainable, so revenue dips are inevitable, but they don't necessarily spell trouble in most states.
There are also questions about whether some Republican-controlled states that have discussed eliminating whole sections of the tax code (notably Mississippi, Indiana, Louisiana, and South Carolina) might renew those efforts in the new year. Typically these discussions revolved around eliminating the personal and corporate income taxes, but an undercurrent of these plans is the likely need to raise new revenue to backfill what would be lost, often by expanding the sales tax base or hiking the sales tax rate.
Tracking State Tax Legislation
MultiState’s tax team is actively identifying and tracking important tax legislation so that businesses and organizations have the information they need to navigate and effectively engage. If your organization would like to furthertrack this and other tax issues, pleasecontact us. For more information on tax policy changes from 2023, check out the full recap from MultiState's tax team.