Flush with cash, many states are generously spending excess funds—here’s how that can benefit you…
FIRST OF ALL, WHY IS THIS HAPPENING?
Now that they are sitting on piles of cash, some states have started to pursue tax relief in various ways. Many states have experienced a remarkable growth in revenues over their last fiscal year. While the source of revenue has differed, generally it has come from two causes:
- increased tax collections and/or
- federal funding for pandemic relief.
It’s no secret that for most states, tax collections are on the rise. One reason being that more businesses are subject to sales tax regimes across the country. The landmark Wayfair v. South Dakota decision in 2018 cleared the way for state departments of revenue (‘DORs’) to enforce economic nexus which has brought in taxpayers that historically would not be subject to that state’s sales tax rules.
By 2023, every state that imposes a sales tax will also have an economic nexus statute, regulation, or rule of some sort.
Cash in hand, states are considering various ways to use these funds. Some states such as Illinois and Virginia are reducing sales tax rates applicable to certain goods (grocery, fuel, etc.). Other states like Florida have passed legislation creating sales tax holidays as way of providing tax relief. Meanwhile, some states, like California and New Jersey, have opted for or are considering direct relief to taxpayers by issuing payments either to all taxpayers or to certain types of taxpayers.
Here’s a look at how some states are spending their newfound funds.
In Arizona, the FY23 budget is at a bit of a stalemate with Governor Ducey and Republican legislative leaders each having their own proposals. Governor Ducey has suggested the creation of a State Earned Income Tax Credit (EITC) matching 5% of a taxpayer’s refundable federal benefit. Republican leaders have proposed, among other things, expanding the voucher program for private and parochial schools to include all families in poverty. They also are seeking to accelerate the tax cut package passed last year which introduced a single tax rate of 2.5%.
California has a projected $97.5 billion surplus and is considering a few different spending proposals:
- Direct relief to taxpayers making under $125,000;
- Suspending the state’s portion of the sales tax diesel;
- Excluding Paycheck Protection Program loans forgiven under the 2021 extension of the federal program from state income tax;
- Increasing the sales tax exclusion awarded to green manufacturing equipment for projects that process lithium used in electric vehicle batteries;
- An expansion of the manufacturing equipment sales tax exemption beyond the current 3.9375%.
In Florida, the legislature passed a budget with $43.7 billion in spending which provides for a slew of tax relief measures. There are three remaining sales tax holidays in Florida ranging from 7 to 14 days that cover a variety of goods:
- A 14-day “back-to-school” sales tax holiday from July 25, 2022, through August 7, 2022, for certain clothing, school supplies, learning aids and puzzles, and personal computers.
- A 7-day “recreational” sales tax holiday (“Freedom Week”) from July 1, 2022, through July 7, 2022, for specified admissions, boating and water activity supplies, camping supplies, fishing supplies, general outdoor supplies, residential pool supplies, and sporting equipment.
- A 7-day “tools” sales tax holiday from September 3, 2022, through September 9, 2022, for tools and equipment needed in skilled trades.
Florida has enacted temporary and permanent sales tax exemptions:
- A two-year sales tax exemption from July 1, 2022, through June 30, 2024, for impact-resistant windows, doors, and garage doors.
- A one-year sales tax exemption from July 1, 2022, through June 30, 2023, for children’s clothing, shoes, and diapers.
- A one-year sales tax exemption from July 1, 2022, through June 30, 2023, for certain ENERGY STAR certified refrigerators, refrigerator/freezer combinations, water heaters, and clothing washers and dryers.
- A three-month sales tax exemption from May 14, 2022, through August 14, 2022, for children’s books.
- A permanent sales tax exemption for admissions to Formula One Grand Prix races, FIFA World Cup matches, and Daytona 500 races.
- A permanent sales tax exemption for equipment used in the production of green hydrogen.
- A permanent sales tax exemption for the purchase of farm trailers and certain fencing
Florida also authorized direct relief to teachers and police officers.
Illinois recently passed a $46 billion budget with a number of tax relief measures included. The budget would see the state’s 1% sales tax on groceries eliminated for the upcoming fiscal year (July 1, 2022 through June 30, 2023).
It should be noted that the Regional Transportation Authority and Metro-Mass Transit District impose an additional local tax on groceries which is not eliminated and would still be due. The state’s fuel tax was originally going to be increased due to inflation by $.022, but is instead frozen at $0.392 per gallon through January 2023. Direct relief for families is also included, but there are income limitations to those measures.
Michigan had recently sent its governor a package of $2.5 billion in tax cuts that would be effective in 2023. Included in this package is a reduction of the state’s flat income tax rate from 4.25% to 4%. The personal income tax exemption would increase by $1,800. An increase to the state’s earned income tax credit up to 20% of the federal credit in also in the package. Governor Whitmer would prefer different tax measures, and on June 10th vetoed the proposed legislation and stated that in its current form, the legislation ran afoul of the state’s constitution. Specifically, the governor suggests a sales tax holiday on gas, repealing the Retirement Tax, tripling the Michigan Earned Income Tax Credit to its pre-2012 amount of $450, and tax rebates in the amount of $500 per family.
New Jersey’s state senate budget committee recently announced a resolution that includes a detailed plan on how to spend $9 billion in unexpected tax revenues and $3 billion in federal coronavirus aid that remains unallocated. The senate budget committee is considering proposals that include direct relief through rebates of $1,000 and $500. Under the main bill in the initiative, taxpayers with gross income of $500,000 or less would receive a $1,000 credit if married filing jointly, and individuals would receive a $500 credit.
A second bill, the Gas Price and Inflation Tax Credit Act, would provide an additional $500 refundable income tax credit to families with income less than $250,000. The senate budget committee is also considering the elimination of 2.5% corporate surtax. Governor Murphy has proposed property tax relief that allows allow for homeowners making up to $250,000 to get a credit toward their property taxes of up to $700 in the fiscal year beginning July 1, 2022.
New Mexico has seen revenues sky rocket through a combination of federal aid and revenue from the oil and gas industry. Overall revenue levels are $442 million above estimates made in December. Governor Grisham has proposed reducing the state’s portion of the gross receipts tax from 5.125% to 4.875%. Personal income tax rebates are also in the works in the amounts of $250 for individuals and $500 for joint filers.
New Mexico revenue levels are tracking at $442 million above estimates made in December by executive and legislative economists. Below is a breakdown of which revenue sources are up – and which are down – for the current budget year that ended June 30.
New Mexico revenues at a glance (information courtesy of the New Mexico Legislative Finance Committee):
- Gross receipts tax – $248.4 million up
- Personal income tax – $243.7 million up
- Investment income – $111.2 million down
- Mineral production taxes – $20.5 million up
- Corporate income tax – $43.8 million up
Estimates in North Carolina suggest the state will collect $6.2 billion more than anticipated in the current two-year budget cycle. Last year, Governor Cooper signed a bill that reduced personal income tax rates over six years from 5.25% to 3.99%; the bill also phases out corporate income tax beginning in 2025 and ending in 2031.
Oklahoma has also seen tax collections increase. Collections in the 2021 fiscal year were 10.6% greater than that of 2020. There was a special session called for June 13, 2022 to discuss two tax measures:
- One would eliminate the state’s sales tax on groceries and
- the other would lower the income tax rate by one-quarter percent.
This on the heels of Oklahoma House Bill 2962 being passed last year which reduced the individual tax rate by 0.25% effective January 1, 2022.
In Texas, tax collections are incredibly high. As of May 2022, sales tax collections are 20.16% higher compared to the same period last year. Total tax collections, across all tax types, are up 35.96%. The largest tax relief item being considered is a property tax proposal that would eliminate a large component of homeowner’s property tax bill— the school district Maintenance and Operations (M&O) tax rate.
Through the first 7 months of their fiscal year, Virginia’s tax collections are up $1.4 billion. The recently enacted budget includes measures that would provide direct relief of $250 for individuals and $500 for married couples. The state’s portion of the sales tax on groceries and essential personal hygiene products is reduced to 0%. The measures do not eliminate the local option tax on groceries—that option would still apply.
Virginia has also increased the standard deduction for individuals and joint filers to $8,000 and $16,000, respectively. Lastly, the state’s earned income credit would become refundable equal to 15% of the federal earned income tax credit claimed in taxable years 2022 to 2025.
Our advice? Get prepped now to take advantage of time-sensitive tax relief opportunities.
As states generously spend their excess funds it will be critical for taxpayers, both individuals and businesses, to keep up to date so that they can make the most of these opportunities and remain in compliance. Many of the measures discussed above are temporary or subject to certain limitations.
Your trusted REDW State and Local Tax (SALT) advisors can help you decipher the latest state and local tax developments. Don’t hesitate to reach out to me, Americo Rodriguez, below.