Jamie C. Yesnowitz
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The 2020 general elections, held on Nov. 3, 2020, provided an opportunity for voters across the country to cast ballots on a variety of important state and local tax issues in addition to deciding the federal, state and local executive and legislative races.1
The major ballot initiatives in California and Illinois have received much attention, but ballot initiatives in several other states also merit consideration. Colorado and Arizona voters approved changes to income tax rates. Voters in three states authorized sports wagering, while voters in Nebraska approved gaming operations at racetracks and a corresponding tax. Voters in several states followed the trend of legalizing and taxing marijuana. Finally, Colorado voters approved a constitutional amendment that will allow residential property taxes to increase.
Income tax initiatives
Colorado Proposition 116
Colorado’s Proposition 116, which was approved by approximately 57% of the voters, reduces the flat corporate and personal income tax rate from 4.63% to 4.55%.2
This change retroactively applies to tax years beginning on or after Jan. 1, 2020.
Arizona Proposition 208
Arizona voters enacted Proposition 208 with approximately 52% of the vote.3
Proposition 208 imposes a 3.5% tax surcharge on taxable annual income over $250,000 (single filers) or $500,000 (joint filers). Under existing law, the highest Arizona personal income tax rate is 4.5%. The surcharge will be imposed beginning with the 2021 tax year. The surcharge, which will be used to fund public education, must be collected regardless of whether the Arizona income tax rate brackets are changed, replaced or eliminated in the future.
Voters in three states approved sports wagering. Louisiana voters in 56 of the state’s 64 parishes approved uniform local ballot initiatives to permit sports wagering activities and operations in the parish.4
Maryland’s Question 2, which was approved by approximately 66% of voters, allows the expansion of commercial gaming in the state to authorize sports and events betting for the primary purpose of raising revenue for education.5
South Dakota’s Constitutional Amendment B, which was approved by approximately 58% of the vote, authorizes the legislature to allow sports wagering in the City of Deadwood.6
Nebraska voters approved gaming operations at racetracks and a corresponding tax. Nearly 65% of voters in the state approved a proposal, Initiative Measure 430, which allows games of chance to be conducted by authorized gaming operators within licensed racetrack enclosures in Nebraska.7
Also, Initiative Measure 431, which imposes a 20% annual tax on gross gaming revenue from games of chance operated at licensed racetrack locations, was approved by nearly 69% of Nebraska voters.8
In the 2020 elections, Arizona, Montana, New Jersey and South Dakota voters all approved legalization of marijuana sales. Under Proposition 207, Arizona legalized the retail sale of marijuana with a 16% excise tax, approved by nearly 60% of the vote.9
Montana’s Initiative No. 190, enacted with nearly 57% of the vote, allows the recreational use of marijuana and imposes a 20% tax on its sale.10
New Jersey’s Public Question 1, approved by approximately 67% of voters, authorizes a constitutional amendment that legalizes the recreational use of marijuana and subjects it to the state sales tax.11
Also, New Jersey municipalities may impose an additional tax not to exceed 2% on marijuana sales. South Dakota’s Constitutional Amendment A, which was approved by approximately 54% of the vote, legalizes the recreational use of marijuana and imposes a 15% tax on marijuana sales.12
Colorado property tax
Colorado’s Amendment B was approved by approximately 57% of the voters.13
Amendment B repeals the Gallagher Amendment to the Colorado Constitution that required the ratio of residential property tax revenue to nonresidential property tax revenue to remain the same as when the Gallagher Amendment was adopted in 1982.14
As a result, the Gallagher Amendment limited the taxable value of residential property to 45% of taxable property in the state. Amendment B also removes the nonresidential property assessment rate of 29% from the Colorado Constitution. During the period following adoption of the Gallagher Amendment, residential property values generally have grown faster than nonresidential property values. Because the residential assessment rate was adjusted to maintain the ratio, the legislature gradually reduced the assessment rate on residential property from 21% to the current rate of 7.15%. The residential property rate was projected to further decrease in the future. Under Amendment B, the residential assessment rate will remain at the current 7.15% rate and the nonresidential assessment rate will remain at 29%. Amendment B is expected to increase property tax revenue over time for many local governments.
Alaska oil production tax
Alaska voters rejected Ballot Measure 1 with nearly 65% of the vote.15
Alaska Ballot Measure 1 would have changed the oil and gas production tax for areas of the North Slope16
where a company produced more than 40,000 barrels of oil per day in the prior year and more than 400 million barrels total. For any areas that met these thresholds, the tax would be the greater of one of two new taxes: (i) the alternative gross minimum tax; or (ii) the additional production tax.17
Portland, Oregon payroll tax
Approximately 57% of voters in the Portland, Oregon area rejected Measure 26-218, which would have authorized a 0.75% payroll tax beginning in 2022 on employers with more than 25 employees to fund transportation improvements.18
Many of the state ballot initiatives considered by voters at the 2020 general elections address changes to income tax rates, property tax structures, or the adoption of “sin” taxes, and most of the decisions made by voters comport with recent state tax trends. In many cases, these changes will be helpful from a revenue standpoint, which is especially important as states try to survive in and ultimately recover from the pandemic. Arizona is the latest state to subject high-income individuals to a substantially higher tax rate to increase state revenue, consistent with a growing movement to add progressivity to state income tax regimes via legislation. Likewise, the changes to the taxation of property in Colorado also should produce additional tax revenue.
In recent years, the legalization of previously prohibited activities and the concurrent enactment of various “sin” taxes has become a popular subject that voters have been asked to decide. In response to the U.S. Supreme Court’s 2018 decision declaring the Professional and Amateur Sports Protection Act unconstitutional,19
many states began legalizing sports betting activity and enacted corresponding taxes. The sports gambling recently approved by voters in Louisiana, Maryland and South Dakota follows this pattern. States also have been legalizing the recreational use of marijuana and enacting tax on the marijuana sales. Voters in Arizona, Montana, New Jersey and South Dakota readily passed initiatives to legalize and tax the sale of marijuana. The imposition of these “sin” taxes has become a popular method of raising additional state revenue.
While tweaks to existing tax regimes and new taxes on activities that are now legal appear to be accepted by voters in many cases, developing support for new taxes is somewhat more challenging. For example, headcount taxes for specific needs have been considered by local jurisdictions, particularly in Western municipalities, but adoption of these taxes frequently is challenged by prominent employers that often would have the most to lose. Local voters in the Portland, Oregon area rejected a payroll tax to improve transportation, but Portland leadership has indicated efforts to fund the projects will continue.20
The resolution of numerous ballot questions clearly will affect the mix of revenues that many states will be able to generate in what might possibly be the most difficult financial circumstances that they have ever faced. It is interesting to note that in this precarious environment, where significant state-level political change may have been expected, the composition of state legislatures and governors looks to have remained remarkably stable.21
In this year’s elections, the only political changes in legislative control occurred in the New Hampshire Senate and House of Representatives. Both chambers will now be controlled by Republicans following a shift to control by Democrats in 2018. Overall, this is the least amount of change of state legislative control since at least 1944.22
The political composition of governors also was very stable. Montana was the only state where the governorship changed political parties, as the Democratic Montana governor left office due to term limits and a Republican was elected. Democrats continue to have a “trifecta” (control of the governorship and both legislative chambers) in 15 states, while Republicans hold full control in 23 states. The prevalence of many state trifectas, along with the growing economic challenges resulting from the COVID-19 pandemic, may increase the likelihood of significant state tax reforms being enacted in the coming year.
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