SALT Outlook: Our predictions for 2026

Our annual state and local tax (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 2026. For a review of the 10 major SALT developments from last year, see “Top SALT Stories of 2025.”

Our 2026 predictions

1. State reactions to OBBBA provisions

The enactment of the OBBBA in July 2025 brought with it significant taxpayer-favorable federal tax changes, including the return to the immediate expensing of domestic research and experimental (R&E) under IRC Sec. 174A, the restoration of 100% bonus depreciation of eligible property under Sec. 168(k), a new provision allowing for a special depreciation allowance for qualified production property (QPP) under Sec. 168(n), and an increased business interest expense deduction under Sec. 163(j).

In response, many states were forced to examine the impact of the federal tax changes on their own fiscal regimes.¹ Rolling conformity states in particular stand to lose millions of dollars in revenue without taking any specific legislative action due to their automatic adoption of the Internal Revenue Code, meaning that a narrowing of the federal tax base immediately results in a smaller state tax base.

In 2025, several jurisdictions including Delaware, the District of Columbia, Illinois, Michigan, Pennsylvania, and Rhode Island, quickly acted to decouple from major OBBBA provisions in an effort to prevent significant revenue shortfalls in the coming years,² and other states are evaluating the fiscal impact of the federal tax changes as they begin their 2026 legislative sessions.

On the international front, the OBBBA amended IRC Sec. 951A by repurposing GILTI to NCTI and making changes to the calculation, while renaming FDII to foreign-derived deduction eligible income (FDDEI). Unlike with the domestic OBBBA provisions, whether to conform to NCTI and FDDEI can be more complex. States will need to consider whether additional legislative action is necessary to conform to NCTI, which is not the same as conforming to GILTI.

Considering these complex OBBBA conformity questions, we predict that: (i) at least five states will act to decouple from the major OBBBA domestic provisions during their 2026 legislative sessions; and (ii) at least three states will act to decouple from certain aspects of NCTI and/or FDDEI.

2. P.L. 86-272 developments

A growing number of states have formally adopted the MTC’s revised statement on P.L. 86-272 adopted in 2021 to reflect the modern economy and internet business activities, with Massachusetts and New Jersey most recently promulgating regulations adopting the guidance in 2025.³ Given the current lawsuits brought by the American Catalog Mailers Association in New York and New Jersey, along with the ability of state tax authorities to use these interpretations without necessarily releasing public guidance on the subject, we expect an increased amount 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; and (ii) at least two additional states will adopt the MTC’s guidance on P.L. 86-272 via legislation or regulation.

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 by major technology companies that are currently before the Maryland Tax Court. As Maryland continues to experience budget pressures necessitating major tax increases last year, the outcome of the digital advertising tax litigation could impact the state’s budget decisions and planning in the years to come.

In the meantime, other states have considered enacting their own taxes on digital advertising services but have closely monitored the Maryland litigation to determine whether to proceed, although many are growing impatient.

We predict that: (i) after an extended discovery process, the Maryland Tax Court will invalidate the Maryland digital advertising services tax, sending the case on a likely path to the Maryland Supreme Court; while (ii) at least one state will enact its own digital advertising tax or similar tax. Finally, we predict that (iii) at least one novel legal challenge from an affected business will counter state efforts to tax digital advertising or similar taxes.

4. Taxes targeting high earners

Many states have continued to face fiscal challenges in recent years as they consider additional revenue-raising measures to close budget deficits.⁴ However, broad-based tax increases remain unpopular with residents in an economic environment where inflation remains high and affordability is top of mind to voters.

As a result, states may turn to more targeted tax increases on a smaller portion of the population that are often viewed as being able to shoulder the additional tax burden. For example, California is once again considering a one-time wealth tax of up to 5% on individuals and trusts with a net worth of at least $1 billion.⁵ Other states may follow Maryland and Washington by proposing capital gains taxes for individual taxpayers reaching certain income thresholds.

We predict that: (i) at least two states will act to impose “millionaire” taxes targeting high-income individuals in an effort to address budget deficits; and (ii) at least two states will propose capital gains taxes on high-income earners.

5. Continued state income tax rate cuts

Despite a gloomy fiscal landscape for states with declining revenues and slowing revenue collections, other states continue to find themselves in a relatively strong fiscal position and have successfully pursued decreases to corporate and/or individual income tax rates in recent years.⁶ Even though there is some uncertainty with respect to the overall direction of the economy, we expect that some states will be able to continue their tax-cutting objectives and further reduce their income tax rates during 2026.

We predict that at least five states will act to lower corporate and/or personal income tax rates.

6. Taxpayer challenges to income tax apportionment formulas

Over 30 states have adopted a single sales factor apportionment formula over the past 10 years, but many states have provided exceptions to the general apportionment for specific industries that have argued that such methods do not fairly reflect the extent of business activity taking place in the state. Additional industries can be expected to encourage state lawmakers to change the apportionment rules on the basis that it yields a distortive apportionment factor, or alternatively bring legal challenges to the existing apportionment formulas in the absence of legislative action. 

We predict that: (i) at least two taxpayers will bring legal challenges to state single sales factor apportionment formulas; and (ii) at least two court decisions will address taxpayer alternative apportionment requests in specific industry cases. 

7. Sales tax base expansion and litigation

Many states have acted to expand their indirect tax bases in the past few years to include non-traditional transactions and services. The rapid development and expansion of artificial intelligence (AI) also is likely to be considered as a potential target for taxation. At the same time, states continue to look for ways to include digital transactions under existing definitions of tangible personal property. For example, the Colorado Court of Appeals agreed with the Colorado Department of Revenue that Colorado’s definition of TPP is broad enough to include Netflix’s streaming service subscriptions.⁷

We predict that: (i) at least two states will further expand their sales tax bases to include additional digital transactions and/or AI via legislation or regulation; while (ii) at least two court decisions will address state efforts to tax digital transactions under existing definitions of tangible personal property and taxable services.

8. PTE tax extensions

PTE tax regimes continue to be an attractive mechanism to work around the federal SALT deduction limitation that was made permanent by the OBBBA and increased to $40,000 through the 2029 tax year.⁸ Some states had originally enacted PTE taxes that expired at the end of 2025 independent of whether the federal SALT cap expired or was extended, requiring further legislative action.

While some states addressed the extension of their PTE tax sunset dates in 2025, Minnesota, Oregon and Utah were unable to address the sunset of their PTE regimes by the end of their legislative sessions, causing these regimes to at least temporarily expire.

We predict that at least two states will extend their PTE tax regimes in reaction to the extension of the SALT deduction limitation under the OBBBA.

9. Florida v. California lawsuit

In one of the more high-profile state tax lawsuits in recent years, the state of Florida is challenging California’s use of a special sales factor exclusion rule that “supercharges California’s single-sales factor tariff.”⁹

Florida filed the lawsuit at the U.S. Supreme Court on the theory that California’s application of the exclusion rule harms Florida businesses in a disproportionate manner. Florida has further determined that the only way to obtain relief is by bringing a direct lawsuit against California in the U.S. Supreme Court on the basis of original jurisdiction, under which the Court is compelled to hear a case between the two states. However, the Court has declined to grant certiorari for other lawsuits between states in recent years, including the recent state tax lawsuit of New Hampshire v. Massachusetts.

Despite the heightened interest in this litigation from a SALT policy perspective and the unique nature of an original jurisdiction matter, we predict that the U.S. Supreme Court will decline to hear the Florida v. California case.

10. More property tax relief

As discussed above, property owners in many states have been faced with growing property tax burdens as their property values have appreciated considerably in recent years. Due to the increase in property tax obligations for many individual homeowners, states have actively considered various property tax relief measures in 2025.

For example, Delaware enacted legislation that allowed county school districts to set a higher tax rate for commercial properties in an effort to address increased residential property tax bills.¹⁰ The measure, which was challenged in court and ultimately upheld by the Delaware Supreme Court as satisfying the state’s uniformity clause.¹¹

Expecting other states to advance similar property tax relief legislation in 2026, we predict that at least three states will propose legislation to provide further property tax relief to individuals in exchange for other revenue replacement measures, such as increased property tax rates on commercial properties or expansion of their sales tax bases.