Jamie C. Yesnowitz
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The 2018 midterm elections, held on Nov. 6, 2018, provided an opportunity for voters across the country to cast ballots on a variety of important state and local tax issues. In addition to questions considering whether to raise or limit income and sales tax rates, some states and localities addressed the tax treatment of targeted types of goods and services.
Income tax initiatives
California Proposition 2
California’s Proposition 2, enacted with approximately 63% of the vote,1
redirects $140 million per year generated by the California designated “millionaire’s tax,” a 1% tax on income over $1 million, from the funding of mental health services to the repayment of up to $2 billion in bonds. These bonds will fund housing for homeless populations with mental illness.
North Carolina income tax cap amendment
The Income Tax Cap Amendment, supported by approximately 57% of the vote,2
lowers the North Carolina Constitution’s maximum allowable state income tax rate from 10% to 7%.
Maine Question 1
Maine’s Question 1 failed by a substantial margin, with only about 37% support.3
Question 1 would have imposed several new taxes impacting taxpayers with adjusted gross income exceeding the federal Social Security “taxable maximum” ($132,900 for income earned in 2019) in Maine. These proposed taxes would have created a new top marginal individual income tax rate of 9.05% (10.95% for self-employed individuals) and the resulting funds would have been used to create a new Universal Home Care Program.
Colorado Amendment 73
Colorado’s Amendment 73 failed to pass, only receiving about 46% of the vote.4
Under this initiative, Colorado’s flat 4.63% income tax would have converted into a five-tier income tax, with a bottom rate of 4.63% on income earned up to $150,000 and a top rate of 8.25% on income earned over $500,000. This initiative also proposed to increase the corporate income tax rate from 4.63% to 6%. The projected $1.6 billion annual increase in revenue from the tax increases would have been designated for education spending. Lastly, the initiative would have modified the interaction between the Gallagher Amendment and the Taxpayer Bill of Rights (TABOR) to prevent the residential property school tax assessment ratio from falling below 7%.
Sales tax initiatives
Arizona Proposition 126
Arizona’s Proposition 126, which passed with approximately 64% of the vote,5
prohibits the state and its municipalities from enacting new taxes or increasing tax rates on services performed in Arizona, not already in effect as of Dec. 31, 2017. Includable services under the proposition cover a range of economic activities (not including tangible goods), from salon services, pet grooming, amusement, and fitness activities, to financial-oriented activities, such as real estate transactions, banking, and investment management, to healthcare-oriented activities, such as doctor visits.
California – Local Initiatives
Several ballot measures for sales tax increases at the local level in California passed,6
Colorado Proposition 110
- Barstow Measure Q to increase the sales tax from 7.75% to 8.74%;
- Carpinteria Measure X to increase the sales tax from 7.75% to 9%;
- Santa Ana Measure X to increase the sales tax from 7.75% to 9.25%; and
- Santa Maria Measure U to increase the sales tax from 8% to 9% (the measure proposed the increase to be in effect from April 2019 to April 2029, then gradually decreasing to 8.75% until April 2039, and then reverting to 7.75%).
Colorado’s Proposition 110, which proposed an increase to Colorado’s statewide sales tax from 2.9 percent to 3.52% from 2019 to 2038, in order to fund $6 billion in transportation projects, failed with less than 41% support.7
The proposition was designed to authorize the Colorado Department of Transportation to issue bonds up to $6 billion to fund transportation to be repaid through the sales tax increase, with a maximum repayment cost of $9.4 billion.
California: San Francisco gross receipts tax and ‘Mountain View’ head tax
Voters enacted San Francisco’s Proposition C with approximately 61% of the vote.8
Proposition C implements an increase in the business tax rates on gross receipts that will be directed to fund homelessness services. Specifically, Proposition C increases the gross receipts tax rates that currently range from 0.16% to 0.65%, by an additional tax of between 0.175% and 0.69%, based on business activity type. Proposition C requires the city to deposit all the revenue from the additional tax into a new special fund for the following purposes: (i) at least 50% to permanent housing through the Mayor's Office of Housing and Community Development (MOHCD); (ii) at least 25% to mental health services for homeless individuals through the Department of Public Health; (iii) up to 15% to homelessness prevention through MOHCD or the Department of Homelessness and Supportive Housing (HSH); and (iv) up to 10% to short-term shelters through HSH.
With 71% of the vote, Mountain View’s Measure P passed.9
This measure applies an annual per-employee tax to businesses, based on the average number of employees over a prior four-quarter period. Under the measure, businesses with 50 or fewer employees will pay a flat license/registration fee between $100 and $400, and those with more than 50 employees will pay a flat fee ranging from $400 (for businesses with 51 to 500 employees), up to $584 (for businesses with more than 5,000 employees). In addition to these fees, businesses with more than 50 employees will remit a tax of $75 to $150 per employee, based on the company’s size. Revenue from the tax is slated to go into the city’s general fund.
Grocery / soda taxes
Washington’s Initiative Measure 1634, which passed with nearly 56% of the vote,10
prohibits local government entities from imposing any new tax, fee, or other assessment on grocery items, and prohibits any existing taxes, fees, or assessments from being increased after Jan. 15, 2018.
Oregon’s Measure 103 did not fare as well, failing with less than 43% of the vote.11
This measure proposed a ban on the enactment or increase of any state or local tax, fee, or assessment on the sale of groceries. While Oregon does not have a state sales tax, there currently is no law in the state preventing local governments from establishing a sales tax. Measure 103’s prohibition on taxes or tax increases on grocery sales would have applied retroactively to any tax or fee enacted on or after Oct. 1, 2017. Further, the measure would have excluded soda and other sugary beverages from the prohibition.
In the 2018 election, Michigan, Missouri, and Utah voters approved legalization of marijuana sales. Under Proposal 1, Michigan legalized retail marijuana with a 10% tax, approved by 56% of the vote.12
Missouri passed Amendment 2, legalizing medical marijuana, imposing a 4% tax, by more than a 65% majority.13
Lastly, Utah passed Proposition 2, by 53% of the vote, legalizing medical marijuana, but exempting it from sales tax.14
With only 41% of the vote, North Dakota’s Measure 3, legalizing retail marijuana without an established tax rate, failed.15
What can be taken from the results from ballot initiatives involving state and local tax issues in the recent midterm elections? On the income tax side, there did not seem to be a significant push for taxpayers to endorse the creation of new or higher rates for individuals. In contrast, local initiatives that targeted businesses, as well as transaction-based taxes on consumables (such as groceries, soda, and marijuana) were more successful at the polls. One trend to watch is the increasing pressure being put on localities to create special taxes that are mainly imposed on large businesses that have contributed to the growth of their local economies through jobs and investment. This growth has made it more expensive for these localities to provide necessary infrastructure and in some cases has made local housing markets unaffordable for many. For example, a large portion of the revenues from the head tax in California’s Mountain View, a locality in the heart of Silicon Valley, likely will come from several large, growing technology companies with substantial presence in that area. This tax, also contemplated earlier this year in Washington, another area replete with large technology companies, imposes a progressive tax on businesses on a per employee basis.16
The reaction from the companies impacted by these types of new taxes could determine how widespread such taxes will become.17
Apart from the tax initiatives voted on throughout the nation, the composition of state legislatures and governor seats changed significantly in the midterm elections, with outsized gains by Democrats in state-level government and an overall increase in the number of states in which one-party government will become a reality.18
It remains to be seen whether these changes ultimately will result in a state legislative push in 2019 that in the aggregate, mirrors what was successful in this year’s initiatives. Of course, with the significant changes in state and local tax in the last year caused by state reactions to federal tax reform19
and the South Dakota v. Wayfair, Inc.
the budgetary outlook for many states will be extremely uncertain. Accordingly, it may be very difficult to predict how states develop tax policies in this new environment.
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