In the tax world, 2018 was a year filled with new opportunities and challenges. States grappled with major federal changes, continued phasing in their own reforms and made new changes that altered their own landscapes. Overall, net revenue changes were minimal and the largest net tax change was a net increase in sales and use taxes of $847.1 million.
This report includes tax actions taken during regular and special legislative sessions in 2018, as well as actions approved by voters, that result in a revenue impact of $1 million or more. Fifty states and the District of Columbia provided information, which was obtained through a survey of the National Association of Legislative Fiscal Offices. Highlights include:
- Collective actions taken by the 50 states and the District of Columbia resulted in a net tax increase of about $1.3 billion, representing a 0.1 percent increase of the prior year’s tax collections. Figure 1 shows the net tax changes by year from 1995 to 2018.
- States faced an abnormal set of federal changes that resulted in an uptick in activity. In December 2017, the Tax Cuts and Jobs Act was signed into law and cemented the largest overhaul of the nation’s tax code since 1986. In May 2018, the U.S. Supreme Court authorized states to legalize sports gambling in Murphy v. National Collegiate Athletic Association. In June 2018, the U.S. Supreme Court authorized states to require out-of-state sellers to collect taxes on remote sales in South Dakota v. Wayfair, Inc.
- Sales and use tax came in with the largest net tax change with an increase of $847.1 million. All tax categories saw tax increases, except for personal income taxes and health-care-related taxes. Alcoholic beverage taxes experienced no changes.
- Of the 50 states and District of Columbia reporting, nine—Georgia, Kansas, Kentucky, Louisiana, New Jersey, Oklahoma, Oregon, Rhode Island and the District of Columbia—increased net taxes by more than 1 percent. Five states—Idaho, Missouri, Nebraska, New Hampshire and Wisconsin—reported a net decrease of more than 1 percent.
- In addition to tax changes, states approved nontax revenue changes, including fee increases or decreases, revenue accelerations or decelerations, and tax compliance initiatives for a net increase of $867.3 million. This resulted in a combined total revenue increase of about $2.2 billion in 2018.
Kansas and Oklahoma experienced the largest tax increases in 2018. Kansas’ increase was from the extensive tax package passed in the 2017 legislative session that had a series of phase-ins also taking place in 2018. However, the estimated impact of these phase-ins was combined with rate changes that took place in tax year 2018. The state’s tax changes totaled a 7.7 percent increase in revenues compared to 2017’s collections. Oklahoma had a variety of tax changes this year, including motor fuel tax and cigarette tax increases, among others. The state’s enacted changes totaled $490.7 million, or an increase of 5.7 percent.
Nebraska reported the largest tax decrease with a net reduction in revenues of 6.4 percent. This large reduction offset what otherwise would have been a comparably large tax increase for Nebraska taxpayers as a result of the federal 2017 Tax Cuts and Jobs Act (TCJA). Nebraska is a rolling conformity state, meaning that it automatically conforms to the latest version of the Internal Revenue Code (IRC), so absent these legislative changes, the tax increase would have taken place automatically. Lastly, it is worth noting that the estimated large reduction occurred after taking into account the revenue increase from the TCJA based on its interaction with statutory definitions of tax liabilities within the state tax code.
Sales and use taxes experienced the largest increase this year. This is primarily a result of states being authorized to expand their tax bases to include remote sales, which several pursued following the South Dakota v. Wayfair, Inc. decision. Personal income and health-care-related taxes were the only categories to see net decreases. However, these were minor, resulting in decreases of $44.2 million and $3.8 million, respectively.
Tax changes this year were heavily driven by developments that took place outside state legislatures. The 2017 federal tax reform law and U.S. Supreme Court decisions catalyzed diverse changes across the states. As a result, NCSL included an exclusive question in the 2018 State Tax Actions survey asking about state responses to any federal action.
Federal Tax Reform
Just several weeks before most states began 2018 legislative sessions, President Donald Trump signed into law the largest overhaul of the nation’s tax code since 1986. Why does the TCJA affect the states?
Most state tax codes conform to the federal tax code in terms of how they define income. This is generally performed to simplify tax administration. Conformity means if something is taxable at the federal level, it is taxable at the state level. This also means that if an exemption exists at the federal level, it also exists at the state level.
States either have rolling conformity or static conformity. Rolling conformity means a state will automatically conform to the latest version of the IRC. Static conformity references states that must adopt federal changes as they occur. States, however, may “decouple” from federal provisions, such as the standard deduction or personal exemption amounts.
States conform to the federal tax code in a variety of ways, which played a significant role in how the recent changes affected state revenues. For example, Ohio was hardly affected by the 2017 federal tax reform law, unlike many other states. This is primarily due to its Commercial Activity Tax, a gross receipts tax that doesn’t start with any federal definitions. The state also already had a deduction of up to $250,000 in business income under the personal income tax. Overall, changes ended up offsetting each other with a net revenue effect of $0.
In total, 26 states and the District of Columbia enacted tax changes in response to the TCJA. Every state that tackled IRC conformity in 2018 performed changes in its own unique way. Some states generally conformed to TCJA’s changes, such as Georgia and Idaho. Arizona and Virginia both conformed to changes affecting tax year 2017, but none that will affect tax year 2018 or thereafter. Other states, such as California, did not address it at all during the 2018 legislative session. The Minnesota Legislature passed a couple of tax bills addressing federal tax reform, but both were vetoed by Governor Mark Dayton. Overall, the general trends in state responses to federal tax reform were decoupling or clarifying the personal exemption, decoupling from the 20 percent deduction for certain pass-through businesses, and altering standard deductions.
Additionally, the TCJA’s foreign income provisions were also items that the states payed attention to this past year, as it was seen as a major revenue increase by broadening the tax base. For example, Oregon is estimating an additional $140 million from deemed repatriation—under which all foreign profits are “deemed” to have been brought back to the U.S. and are immediately taxed—in FY 2019. Some states were already equipped to include the income in their tax collections, such as Massachusetts. The state is estimating an additional $65 million in corporate income tax collections for FY 2019 from deemed repatriation.
Remote Sales Taxation
In June, the U.S. Supreme Court overturned the physical presence requirement in South Dakota v. Wayfair, Inc. and authorized states to require out-of-state sellers to collect and remit sales and use taxes. This resulted in several states expanding their sales and use tax bases to include online sales.
Eleven states provided responses reflecting revenue estimates for fiscal year 2019 that were pending the court’s ruling. However, it is worth noting that the collection dates may not be what was anticipated when the estimate was made. Also, based on NCSL research, several additional states began enforcing remote sales taxation in fiscal year 2019 than what was reported at the times surveys were completed. States that took action had differing collection dates, from July 1, 2018 to Jan. 1, 2019. The estimated effects on revenue vary widely across the states, ranging from about $7 million to $190 million.
In May, the U.S. Supreme Court declared that the federal Professional and Amateur Sports Protection Act was unconstitutional and authorized states to legalize sports betting. Previously, Nevada was the only state with legalized sports betting. This decision provided states with the opportunity to expand gaming and shore up some new revenues previously generated by the sports betting black market. However, this proved to be the action least capitalized on by states when compared to other federal actions that took place this past year. In 2018, four East Coast states enacted tax changes related to sports betting, including New Jersey, Pennsylvania, Rhode Island and West Virginia. Similar to remote sales tax projections, the estimated effects on revenue also vary widely, ranging from $5.5 million to $70 million.
Personal Income Taxes (net decrease: $44.2 million)
Sixteen states made net reductions to personal income taxes while nine experienced net increases. Compared to personal income tax changes over the last five years, 2018 was a relatively mild year with no significant impact. However, this total was due to some major state increases and decreases offsetting each other.
Kansas, Oklahoma and Oregon experienced the largest personal income tax increases. Kansas phased in a series of changes to deductions enacted in the major tax package passed in 2017, which resulted in a combined increase of $633 million for personal income tax revenues. The estimated impact of these phase-ins is combined with rate changes that took place in tax year 2018. In Oklahoma’s second special session of 2017, the Legislature capped the amount of itemized deductions taxpayers may take, beginning with tax year 2018. This change resulted in an increase of $94 million for fiscal year 2019. Oregon’s increase of $182 million was a result of decoupling from the federal pass-through deduction in the TCJA.
Several states, including Georgia, Idaho, Iowa, Kentucky, Missouri, Utah and Vermont, lowered personal income tax rates.
Corporation and Business Taxes (net increase: $29.6 million)
Similar to 2018’s personal income tax changes, the corporate income tax changes resulted in a minor net change. Six states made net increases to corporate income taxes while 11 experienced net reductions.
New Jersey and Oregon reported the largest tax increases. New Jersey enacted a 2.5 percent surtax on allocated net income over $1 million. This tax change is part of a larger reform measure and is set to drop to 1.5 percent on Jan. 1, 2020. The estimated revenue impact for fiscal year 2019 is an increase of $425 million. Oregon’s estimated increase of $140 million in corporate income taxes is a result of conforming to deemed repatriation in the 2017 federal tax law. This clause levies a mandatory one-time transition tax on accumulated foreign profits.
Indiana and California reported the largest decreases in this tax category, respectively. Indiana phased in a corporate income tax rate reduction in fiscal year 2019, lowering it from 6 percent to 5.75 percent. California extended and reduced its California Competes Hiring Credit, which is a credit available to businesses that want to relocate to the state, or stay and grow in the state.
Similar to Indiana, several other states lowered corporate income tax rates, including Georgia, Idaho, Iowa, Kentucky, Missouri, New Hampshire and Utah. Additionally, five states—Colorado, Kentucky, Maryland, Missouri and North Dakota—enacted or phased in changes relating to apportionment.
Sales and Use Taxes (net increase: $847.1 million)
Thirteen states experienced net increases to sales and use taxes, and 10 reported net decreases. This year’s changes appear relatively on track with the past several years, except for 2017, when California’s temporary sales tax increase expired, resulting in a $1.6 billion revenue loss. This year, the buzzwords in sales and use taxes were: remote sales taxation.
Louisiana, Kentucky and Illinois reported the largest increases, respectively. Louisiana’s $466 million increase was a result of the additional sales tax rate extension. The additional rate was extended at a reduced rate of 0.45 percent. Kentucky’s sales and use tax increase was due to the expansion of its base to include remote sales. The state reported an estimated revenue increase of $192.5 million for fiscal year 2019, but the change is expected to add an additional $3.2 billion to the state’s sales and use tax base. Similarly, Illinois projected an increase of $150 million in sales and use tax revenues due to remote sales tax collection.
Health Care Provider and Industry Taxes (net decrease: $3.8 million)
In 2018, only two states reported tax changes with an impact of $1 million or more within the tax category related to health care. State Tax Actions has found that changes have generally resulted in net increases in the past five years.
Louisiana increased the tax on emergency ground transportation service providers from 3.5 percent to 6 percent, resulting in an increase of $6.1 million for fiscal year 2019. Additionally, Washington provided a tax exemption for Accountable Communities of Health funds, which is expected to produce a revenue decrease of $9.9 million in fiscal year 2019. Oregon and West Virginia also both extended health-care-related taxes, resulting in no change for taxpayers.
Tobacco Taxes (net increase: $298.6 million)
Three states and the District of Columbia enacted changes to tobacco taxes and all resulted in revenue increases. Oklahoma increased the tax rate on cigarettes by $1, raising the rate to $2.03 per pack. The state also modified the tax on little cigars by having the rate based on mills per “stick” rather than on weight. These changes resulted in a total increase of $153.1 million in fiscal year 2019. Kentucky also increased the cigarette and tobacco tax rate from 60 cents per pack to $1.10, which raised revenues by $136 million for fiscal year 2019. The District of Columbia increased the cigarette tax rate from $2.94 to $4.94 per pack of 20 cigarettes. Lastly, New Jersey enacted a 10-cent per fluid milliliter tax on liquid nicotine for e-cigarettes.
These tobacco tax changes are consistent with the net increase trend that has taken place the last three years. The last time a net tobacco tax decrease took place was in 2014, with an overall reduction of $8.7 million.
Motor Fuel Taxes (net increase: $143 million)
Three states reported net increases in motor fuel taxes while only one state reported a net decrease. The category’s net increase is consistent with trends over the last four years.
South Carolina reported the largest increase, resulting in an additional $85.1 million. The state increased the motor fuel tax for fiscal year 2019 by 2 cents per gallon, raising it from 18 cents to 20 cents. Oklahoma also increased the gas tax rate by 3 cents, from 17 to 20 cents, and its diesel fuel tax rate by 6 cents, from 14 to 20 cents.
Utah enacted an inflation adjustment to its motor fuel tax rate, which changed the rate from $0.294 to $0.30 per gallon.
Florida reported a net decrease of $3.7 million. The state enacted a refund for the taxes paid for motor fuel used to transport agriculture after Hurricane Irma. The fuel purchase must have been made between Sept. 10, 2017 and June 30, 2018.
Miscellaneous Taxes (net increase: $25.3 million)
Eight states reported net increases in miscellaneous taxes, while nine states reported net decreases. The largest increases were experienced in Oklahoma and Pennsylvania, respectively. Oklahoma modified its incentive rate for the gross production tax, which resulted in an additional $166.8 million for fiscal year 2019. Pennsylvania reported an additional $70 million for fiscal year 2019 as a result of a law passed in 2017, which authorized sports wagering at the time of the federal ruling.
Fees (net increase: $670 million)
In addition to taxes, 13 states relied on new fees and fee increases to help shore up revenues, while four states reduced them. Virginia, Maryland and Arizona reported the largest net increases. Virginia projected a net increase of $308.3 million. This is primarily due to new fees that were enacted for Medicaid expansion. Similarly, Maryland enacted a health insurance provider fee assessment of 2.75 percent, which is expected to increase revenue by $280.8 million in fiscal year 2019. Arizona’s $91 million increase is from a new fee that will be charged on vehicle registrations.
The largest decrease was reported from Michigan, due to the state’s elimination of Driver Responsibility Fees. This resulted in a loss of $34.5 million.
Other Revenues (net increase: $197.3 million)
Only two states reported nontax policy changes that affected fiscal year 2019 revenue collections. New Jersey established a 90-day tax amnesty program, which was projected to bring in an additional $200 million. Michigan accelerated the phase-in for applying sales tax to the difference between a new vehicle and a trade-in (rather than it being imposed on the full price of the newly purchased vehicle).This was expected to reduce revenues by $2.7 million.
Overall, the 50 reporting states and the District of Columbia made tax, fee and other revenue changes that will result in an anticipated $2.16 billion increase in total revenues for fiscal year 2019.
Tax changes in 2018 as a percentage of 2017 tax collections are listed in Appendix A. State changes by tax type are in Appendix B. Appendix C shows both tax and nontax revenue changes by state. Property tax actions affecting local revenues are discussed in Appendix D. Tax changes by state are displayed in Appendix E.