As we begin a new year, new issues arise for states. As states are dealing with budgets for the year, spending has increased and tax revenue have decreased. The COVID-19 pandemic has changed our lives, the way we work, shop and interact with others.
A few states are seeing their residents, like California, New York and New Jersey, all high tax jurisdictions, moving to and becoming permeant residents of Florida, Texas, and Nevada, all states with low taxes or no state tax on companies or individuals.
How will states deal with these budgetary issues? Decrease spending? Increase tax rates? Expand the tax base? Tax out-of-state companies and Individuals? Increase tax credits and incentives, to attract investment? My guess, all the above, except for decreases to spending.
New Hampshire has brought a lawsuit against Massachusetts, which the Supreme Court of the United States has original Jurisdiction. Massachusetts is imposing its personal income tax on individuals who are not physically located in Massachusetts, thus not earning income in Massachusetts.
Generally, a state can impose an individual income tax on nonresidents if the nonresident earned such income in the state. For example, if a resident of New Hampshire works for a company in Massachusetts and commutes to Massachusetts to work, the individual is subject to Massachusetts’ income tax because the individual earned the income while in Massachusetts.
The Massachusetts Department of Revenue published a rule imposing the state’s 5.05 percent income tax on the earnings of New Hampshire residents who worked in Massachusetts prior to the pandemic. The Massachusetts department of Revenue has taken the position that it is irrelevant that workers were working from home during the pandemic and it believes it has the legal authority to impose such tax.
Is Massachusetts overreaching? It seems it is, but the Supreme Court of the United States will have final say.
Maryland is addressing its budgetary issues by enacting a new tax. Maryland is the first state to impose a tax on the revenue from digital advertisements sold by companies such as Facebook, Google and Amazon. Maryland believes that this new tax will generate as much as an estimated $250 million in the first year after enactment, with the money going to schools.
As a result of Maryland enacting this new tax, other states are pursuing similar efforts. Connecticut and Indiana, for example, have already introduced bills to tax the big tech media companies. Several other states, like West Virginia and New York, fell short of passing new taxes on the tech giants last year, but their proponents may renew the legislation if Maryland is successful to any challenges to its law.
California is addressing its budgetary issues by proposing to increase tax rates on wealthy individuals and creating a new tax on those who have left or thinking about leaving California.
California is proposing an increase in tax on personal income over $1 million, an increase to the state’s corporate income tax rate and closing tax loopholes, to generate at least $2.4 billion in annual revenue. The wealth tax increases taxes on the state’s wealthiest residents. Under this proposal, the state’s highest tax rate would be 16.8%, which is a 26.3% increase from the state’s current top rate.
Another proposal by California is to enact an Exit Tax. Under this proposal, California would impose taxes on former California residents for up to ten years after they have left the state. This proposal seems to be overreaching by California and would not be constitutional.
The Exit Tax would impose a 0.4 % percent annual tax on a taxpayer’s worldwide wealth above $30 million (not counting real estate), based on market value at the end of each calendar year. Part-year residents would pay a prorated tax based on the number of days spent in California annually.
After reading these proposals by California, it is understandable why Elon Musk and others are leaving California and taking up residency in Texas and Florida, states that do not impose a personal income tax.
Illinois is addressing its budgetary issues by closing corporate loopholes, capping deductions and other proposals. The Governor of Illinois wants to eliminate $932 million in corporate loopholes, including capping deductions for operating losses, eliminating the repeal of the franchise tax, putting a cap on the discount for retailers collecting sales tax and lowering the credit for donations to private school scholarship funds.
New York is addressing its budgetary issues with a proposal to enact a stock transfer tax. New York may be reviving this tax which is imposed on stock transfers. The stock transfer tax is like a sales tax on each stock transaction. Wall Street and the exchanges are not happy with this proposal and are considering about relocating from New York to other states if such a tax is enacted.
As states address budgetary issues, compete for investments, and address unemployment, they must understand the direct and indirect economic impact of these proposals. Increasing tax rates, expanding the tax base, enacting new taxes, and closing loopholes may be a short-term answer, but may substantially impact the state in the future as companies look to invest elsewhere or companies and residents relocate to other states.
Freeman Law works with tax clients across all industries, including manufacturing, services, technology, oil and gas, financial services, and real estate. State and local tax laws and rules are complex and vary from state to state. As states confront budgetary deficits due to declining tax revenues and increased government spending, tax authorities aggressively enforce state tax laws to recapture lost revenues.
At Freeman Law, our experienced attorneys regularly guide our clients through complex state and local tax issues—issues that are frequently changing as states seek to keep pace with technology and the evolution of business. Staying ahead requires sophisticated legal counsel dedicated to understanding the complex state tax issues that confront businesses and individuals. Schedule a consultation or call (214) 984-3000 to discuss your local & state tax concerns and questions.