SALT Outlook: Our predictions for 2025

Our annual SALT outlook offers 10 predictions from our SALT team in the Washington National Tax Office, focusing on the SALT issues that we believe will be of primary interest to policymakers, courts, and taxpayers in 2025. For a review of the 10 major SALT developments from last year, see “Top State and Local Tax Stories of 2024.”

Our 2025 predictions

1. PTE taxes

Most states with a personal income tax have adopted a pass-through entity (PTE) tax regime as a workaround to the federal $10,000 SALT deduction limitation adopted under the TCJA. However, the future of the SALT deduction limitation is uncertain because it is scheduled to expire at the end of 2025. The federal government may let the limitation expire, extend the $10,000 cap, or extend the cap with a higher deduction limitation, though the timing on federal action is not yet clear. Some states have enacted PTE taxes that expire at the end of 2025 independent of whether the federal cap expires or is extended, though the possibility of federal action may require a reconsideration of when the PTE regimes should expire. We predict that at least three states will extend their PTE tax regimes in reaction to federal legislative action renewing and/or raising the SALT deduction limitation.

2. Movement of state income tax rates  

While some states continue to be in a strong fiscal position, there has been a general trend during the past two years of states collecting less tax revenue.¹ Due to a strong fiscal position in 2024, in part based on federal payments during and after the pandemic, states such as Arkansas, Georgia, Idaho, and Utah continued the trend of reducing income tax rates during the year. Louisiana enacted legislation late in 2024 adopting flat tax rates for corporate and personal income tax purposes.² We expect that some states will be able to further reduce their income tax rates during 2025. In contrast, other states are seeking ways to increase tax revenue, of which New Jersey’s re-enactment of the 2.5% corporate business tax surcharge in response to budget pressure is an example. States including Alaska, Arizona, California, Maryland, Minnesota, New York, Pennsylvania, and Rhode Island are projecting budget deficits.³ These states will be required to increase their tax collections and/or reduce spending. An approach taken by some states to raise tax revenue is the imposition of a higher or supplemental personal income tax on individuals who have high income. As a result of these trends and fiscal projections, we anticipate that there will continue to be a wide variety of income tax rate changes in 2025. We predict that: (i) at least five states will act to lower corporation and/or personal income tax rates; while (ii) at least two states will act to increase personal income tax rates on high-income individuals.

3.  Digital advertising tax developments

As the first state to enact a digital advertising services tax, Maryland has faced continuing taxpayer challenges through a series of lawsuits currently under consideration by the Maryland Tax Court. With Maryland under severe budget pressure this year, this litigation could even have an influence on the overall discussion of potential tax increases that the state will be considering this year. In the meantime, other states have considered enacting their own tax on digital advertising services but have waited on developments in Maryland to determine whether to proceed. We predict that: (i) after an extended discovery process, the Maryland Tax Court will invalidate the Maryland digital advertising services tax currently in effect, setting up a likely Maryland Supreme Court challenge; while (ii) at least four states will propose their own digital advertising taxes or similar taxes.

4. P.L. 86-272 developments  

At this point, a limited number of states have formally adopted the MTC’s revised statement on P.L. 86-272 that was adopted in 2021 to reflect the modern economy and internet business activities. Based on the ACMA litigation in California and New York, along with the ability of state tax authorities to use these interpretations without necessarily releasing public guidance on the subject, we expect a high level of litigation and legislative activity addressing P.L. 86-272 this year. We predict that: (i) at least three court decisions will address the extent of state authority to interpret the limitations of P.L. 86-272 protection, with at least one state invalidating portions of the MTC’s recently adopted guidance relating to the treatment of internet activities; and (ii) at least two legislatures will nevertheless formally adopt the MTC’s recent guidance relating to the treatment of internet activities.

5. Loper Bright developments  

In June 2024, the U.S. Supreme Court changed the deference accorded federal administrative regulations in Loper Bright Enterprises v. Raimondo⁴ by overturning the 40-year Chevron⁵ doctrine which had required federal courts to defer to federal agencies’ interpretations of ambiguous statutes. In overturning Chevron, the Court held that federal law requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory taxing authority. Courts may not defer to an agency’s interpretation of the law because a statute is ambiguous. Even though Loper Bright is a federal case addressing a federal regulation, many states have incorporated elements of Chevron into their rules of statutory construction. Thus, the decision may have an impact on state tax rulemaking and judicial review, particularly in states that have adopted Chevron deference. We predict that: (i) at least two state administrative tribunals/courts will decide direct taxpayer challenges to state taxing authority interpretations of state tax laws based on Loper Bright; and (ii) at least two state legislatures will address or clarify the extent to which courts give deference to state tax authority regulatory or other guidance.

6. Convenience of the employer / remote work litigation 

The requirement that many employees worked remotely from their homes during the pandemic had an impact on the imposition of personal income tax in many state and local jurisdictions. In some instances, employees remotely worked in a state that was different from the state where their office and employer were located. States such as New York have a “convenience of the employer” test that subjects a nonresident receiving income from New York employers to the state’s personal income tax unless it is shown that the employer required the nonresident to work outside the state. Likewise, other states and municipalities adopted temporary pandemic-era teleworking rules impacting nonresidents. Although employees are no longer required to work from home due to the pandemic, the taxation of remote workers remains relevant because many employees are working from home much of the time, and the litigation on this issue in New York, Ohio and Missouri in the past couple of years addressing pandemic-era rules is unlikely to signal the end of the debate. We predict that at least three more courts or administrative tribunals will decide personal income tax disputes regarding remote work, in an attempt to provide more clarity regarding the limits of states’ convenience of the employer rules.  

7. Remote seller thresholds  

The recent trend of states enacting legislation to repeal the transaction threshold provides relief to remote sellers that engage in sales transactions in a state at a relatively low selling price. In this situation, a remote seller may have a costly collection obligation in a state even if the dollar amount of its sales is very low. While we do not see an effort unifying all of the post-Wayfair remote seller legislation standards throughout the states, the move away from the transaction threshold looks to continue. We predict that at least three more states will enact legislation dropping the transaction threshold from their sales tax economic nexus provisions.

8. International provisions and deduction / apportionment treatment 

The TCJA, which was enacted in 2017, included an overhaul of the federal taxation of U.S. corporations that earn international income. IRC Sec. 965 created a one-time tax for the 2017 tax year in which taxpayers’ subpart F income from controlled foreign corporations (CFCs) was effectively increased by the accumulated post-1986 deferred foreign income of the CFCs. Also, the TCJA introduced the concepts of global intangible low-taxed income (GILTI)⁶ and foreign-derived intangible income (FDII).⁷ In 2024, the treatment of international income received renewed focus after the U.S. Supreme Court upheld the constitutionality of IRC Sec. 965 and deemed repatriation in Moore v. United States.⁸ At least two state courts released decisions in 2024 on the treatment of repatriated income under IRC Sec. 965 that referenced the Moore decision. In Precision Castparts Corp. v. Nebraska Department of Revenue, the Nebraska Supreme Court held that income, which represented retained earnings of the taxpayer's foreign subsidiaries that were included on its 2017 federal income tax return under IRC Sec. 965, could not be deducted from Nebraska income as dividends deemed to be received under state law.⁹ Also, the Oregon Tax Court considered the state tax apportionment treatment of repatriated “deemed dividends” arising under IRC Sec. 965 in Microsoft Corp. v. Department of Revenue.¹⁰ The court held that the 20% repatriated income remaining after the state’s dividends received deduction (DRD) must be “reincluded” in the sales factor denominator for the water’s edge group. However, the court determined that the taxpayer could not use alternative apportionment to include additional amounts that were excluded from the tax base as a DRD in the sales factor denominator. We predict that at least three courts will address how international inclusions developed under the TCJA, including mandatory repatriation, GILTI and FDII, should be treated for corporate income tax base and apportionment purposes.

9. Sales tax base expansion 

Many states have acted to expand the indirect tax bases in the past few years to include non-traditional transactions and services. Most recently, in late 2024, Louisiana enacted legislation that broadens the tax base to include the sale at retail, use, consumption, distribution, and storage for use or consumption in Louisiana, of digital products beginning Jan. 1, 2025.¹¹ The rapid development and expansion of artificial intelligence (AI) also is likely to be considered as a potential target for taxation. We predict that: (i) at least two states will further expand their sales tax bases to include a category of digital transactions via legislation or regulation; while (ii) at least two states will address the taxability of AI fees/services via legislation, regulation or administrative guidance.

10. Property tax reform 

Property owners in many states are confronted with a growing property tax burden as their property values have risen considerably during the past few years. Due to the increase in property tax obligations, particularly for many individual homeowners, states have been considering property tax relief. In 2024, Colorado enacted legislation reducing property taxes for most classes of property stating in the 2024 property tax year.¹² Nebraska enacted legislation providing tax relief and limiting property tax growth.¹³ Voters also considered property tax relief measures during the November 2024 elections. In Georgia, voters authorized the legislature to amend the Georgia Constitution to provide a statewide homestead exemption that limits increases in the assessed value of homesteads beginning Jan. 1, 2025.¹⁴ North Dakota voters rejected a measure that would have largely eliminated property taxes,¹⁵ but North Dakota Gov. Kelly Armstrong recently proposed a plan to phase out property tax on the majority of primary residences in the state.¹⁶ We predict that at least four states will propose legislation to de-emphasize the scope of the property tax imposed on individual residences via long-term phaseouts or significantly expanded exemptions.