Voters decide various tax legislation in ballots

The 2022 general elections, held on Nov. 8, 2022, provided an opportunity for voters across the country to cast ballots on a variety of important state and local tax issues in addition to electing members of Congress and deciding state and local executive and legislative races.¹ Some of the most significant tax ballot measures in this year’s elections concerned income tax rates. While California voters rejected a measure to increase income tax on high-income individuals, Massachusetts voters authorized an additional tax on high-income individuals. Colorado voters approved a measure to reduce the income tax rate, but also voted to limit itemized deductions for high-income individuals.

Voters also considered a wide variety of other tax issues. California voters defeated two measures that would have authorized sports wagering. In Los Angeles, voters approved a “mansion tax” on the transfer of real property valued at over $5 million. Voters in San Francisco approved a tax on residential building owners who keep units vacant for a long period of time. Arizona voters approved a measure requiring a 60% supermajority to approve a tax. In West Virginia, voters rejected a proposal that would have allowed the legislature to exempt certain types of property from ad valorem tax. Finally, voters in five states considered the legalization of recreational marijuana, with voters in Maryland and Missouri approving the marijuana measures, and voters in Arkansas, North Dakota, and South Dakota rejecting these measures.

Income tax initiatives

California Proposition 30

California voters rejected Proposition 30 with approximately 59% of the vote.² This proposition would have required taxpayers to pay an additional 1.75% tax on personal income over $2 million annually. The revenue collected from this additional tax would have supported zero-emission vehicle programs and wildfire response and prevention activities. This tax was projected to increase annual state tax revenue by several billion dollars.

Colorado Propositions 121 and FF

Colorado voters enacted Proposition 121 with over 65% of the vote.³ This proposition makes a change to the Colorado Revised Statutes, reducing the state income tax rate from 4.55% to 4.40%. Also, Colorado voters approved Proposition FF by nearly 56% of the vote.⁴ Under this proposition, individuals who have federal taxable income of $300,000 or more will be limited for state income tax purposes in the use of their itemized deductions to $12,000 for single tax return filers and $16,000 for joint tax return filers. This is projected to annually increase state tax revenue by approximately $100 million to support healthy meals for public school students.

Massachusetts Question 1

In Massachusetts, approximately 52% of voters approved a constitutional amendment to impose an additional 4% tax on income over $1 million, with the proceeds going to education, roads and bridges, and public transportation.⁵ This income level will be adjusted annually for inflation, and the tax applies to tax years beginning on or after Jan. 1, 2023.

Other taxes

California gaming taxes

California voters rejected two different sports wagering propositions. Approximately 70% of voters rejected Proposition 26, which would have allowed four racetracks to offer in-person sports betting and tribal casinos to offer in-person sports betting, roulette, and games played with dice if permitted by individual tribal gambling arrangements with the state.⁶ Also, over 83% of California voters rejected Proposition 27.⁷ This proposition would have permitted licensed tribes or gambling companies to offer online sports betting over the internet and mobile devices on non-tribal lands in California.

California local ballot measures

Over 54% of voters in Los Angeles approved Proposition ULA.⁸ This proposition authorizes a “mansion tax” of 4% on sales or transfers of real property exceeding $5 million but less than $10 million and a tax of 5.5% on real property valued at $10 million or more. The property value thresholds will be adjusted annually for inflation. This tax is projected to generate annual revenue between $600 million and $1.1 billion and will be used to fund affordable housing.

In San Francisco, over 52% of voters approved Proposition M, which imposes a tax on vacant residential units.⁹ The city is directed to tax owners of buildings with three or more residential units for each unit that has remained vacant for more than 182 days in a calendar year. The tax will be imposed at a rate between $2,500 and $5,000 per vacant unit in 2024 and up to $20,000 in later years with adjustments for inflation. The tax is projected to generate estimated annual revenue of $20 million to $37 million per year and continue until Dec. 31, 2053. The funds will be used for rent subsidies and affordable housing.

Arizona supermajority approval for tax proposals

In a very close election, over 50% of Arizona voters approved a ballot measure, Proposition 132, amending the Arizona Constitution to require that an initiative or referendum to approve a tax receives 60% approval by voters, rather than by a simple majority.¹⁰ The Arizona legislature put this measure on the ballot after a simple majority of voters approved a tax on high-income individuals under Proposition 208 in Nov. 2020, but the Arizona Supreme Court ruled that the proposition was unconstitutional.¹¹ On remand, an Arizona trial court permanently enjoined Proposition 208.¹²

West Virginia personal property tax exemption

In West Virginia, approximately 65% of voters defeated Amendment 2, which would have amended the state constitution to provide the legislature with authority to exempt personal property (including machinery, equipment and inventory) directly used in business activity and personal property tax on motor vehicles from ad valorem property tax.¹³

Marijuana taxes

In the 2022 general elections, voters in five states addressed whether to legalize, and in some cases how to tax, the sale of marijuana. Maryland’s Question 4, enacted with over 65% of the vote, legalizes the use of marijuana beginning in July 2023 and directs the Maryland legislature to enact laws for the use, distribution, regulation, and taxation of marijuana.¹⁴ In Missouri, approximately 53% of voters approved Amendment 3, which legalizes the purchase, possession, consumption, use, delivery, manufacture, and sale of marijuana for personal use and enacts a 6% tax on the retail price of recreational marijuana.¹⁵ Approximately 56% of Arkansas voters rejected Issue 4, which would have legalized marijuana for personal use and imposed a 10% tax on marijuana sales.¹⁶ North Dakota voters rejected Statutory Measure 2, which would have legalized marijuana, by a vote of nearly 55%.¹⁷ In South Dakota, approximately 53% of voters rejected the legalization of marijuana by voting down Initiated Measure 27.¹⁸

Commentary

Many of the significant state tax ballot initiatives considered by voters during the 2022 general elections concerned changes to income tax rates or the adoption of “sin” taxes, with somewhat inconsistent results that do not fully comport with recent state and local tax trends. With respect to income tax rate changes, most states currently are in a strong fiscal position, in part through significant federal funding allocated by the American Rescue Plan Act¹⁹ to address the effects of the COVID-19 pandemic, and collection of tax revenue that exceeds projections. Therefore, one would have expected to see ballot initiatives addressing further reduction of tax rates in this environment.

At the same time, some large states, including California and New York, have projected that they may experience budget deficits in the near future. With the constant specter of eventual budget stress, efforts to generate additional revenue by imposing taxes on those most perceived to be able to afford them continue to be relatively popular, as several states recently have targeted “millionaire” taxes on high-income individuals. The decision by Massachusetts voters to impose an additional tax on income over $1 million — an initiative which initiative took several years to reach the ballot — is consistent with this pattern. In contrast, the decision by California voters to reject an additional tax on personal income over $2 million does not follow this trend. This result may stem from the fact that California has a progressive and steep personal income tax rate bracket regime, and already imposes an additional 1% personal income tax on income over $1 million, resulting in the highest marginal personal income tax rate (13.3%) imposed by a state. Colorado voters managed to follow both the general lower tax rate and targeted higher tax rate trends, by simultaneously adopting a lower overall income tax rate while increasing the tax on individuals with income of at least $300,000 by limiting itemized deductions.

With respect to the sports wagering and marijuana initiatives, states recently have become very receptive to enacting so-called “sin” taxes. Therefore, California voters’ rejection of two separate sports wagering propositions could be considered somewhat surprising. As far as the legalization and consequent taxation of marijuana, the voters considering the issue in this year’s elections were split. Of note, in 2020, South Dakota voters legalized marijuana, but the South Dakota Supreme Court subsequently struck down the amendment for procedural reasons. South Dakota voters apparently changed their minds in 2022 and decided against legalizing marijuana. Finally, while the Los Angeles mansion tax and the San Francisco residential vacancy tax are not sin taxes per se, they are designed to generate revenue from highly targeted taxpayers and transactions, and with respect to the San Francisco tax, encourage behavior intended to reduce the problem of long-term residential vacancies.

Beyond the tax and other issues considered by voters on ballot initiatives, the 2022 elections have brought some interesting changes in the political composition of the executive and legislative branches of state government.²⁰ In Michigan, both the House and Senate are now controlled by Democrats. Also, the Minnesota House changed to Democratic control and the Pennsylvania House is expected to similarly change. Accordingly, Democrats have gained “trifectas” (control of the governorship and both legislative chambers) in Michigan and Minnesota, along with Maryland and Massachusetts as a result of the election of Democratic governors. Following the 2022 general elections, Republicans continue to have 23 state trifectas and Democrats now have 19 state trifectas, with the remaining states having divided governments.²¹ The prevalence and increase of state trifectas could lead to the enactment of significant state tax legislation in the coming year to the extent that leaders of the executive and legislative branches in these states are able to work together. At the same time, each state’s independent fiscal condition will continue to be a significant factor in determining the extent to which important state and local tax legislation can be pursued or enacted in the coming year.