Oct 10
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Below are key changes that states made to their tax systems during 2010.
State Changes to Individual Income Taxes
Individual Income Tax Increases
- Oregon voters on January 26 approved Measure 66 by a margin of 54% to 46%, ratifying an income tax increase retroactive to January 1, 2009. The new brackets are 10.8% on income over $125,000 and 11% on income over $250,000. After 2011, the new 10.8% rate will drop to 9.9%, and the 11% bracket will be eliminated. Oregon’s 11 percent personal income tax is now tied with Hawaii’s for the highest rate in the country. Because its capital gains tax rate is linked to the income tax, Oregon’s tax on investment gains is also the nation’s highest.
Individual Income Tax Decreases
- California’s across-the-board addition of 0.25% to each tax bracket will expire on schedule on December 31, 2010, after existing for two years. The top rate will drop from 10.55% on income over $1 million to 10.3%. Newly elected Gov. Jerry Brown (D) has proposed a ballot initiative to re-enact the higher rates.
- Maryland’s top income tax rate of 6.25% on income over $1 million expired as planned on December 31, 2010. The tax had been enacted on a temporary basis in 2008. Newly re-elected Gov. Martin O’Malley (D) opposes the extension of the tax. The City of Baltimore increased its income tax from 3.05% to 3.2%, effective January 1, 2011.
- New Jersey’s “millionaire’s tax” income tax rates, with a top rate of 10.75%, were allowed to expire as scheduled on December 31, 2009, despite calls to renew them. Governor Chris Christie (R) vetoed a bill to do so in June 2010. The new top rate is 8.97%, matching New York.
- North Carolina’s tax surcharge of 2% on those with incomes over $60,000 and 3% on those with incomes over $150,000 expires on December 31, 2010, after existing for two years.
- Ohio postponed for one year a planned 4.2% reduction in income tax rates, due to begin in January 2010. This income tax reduction will now occur in January 2011.
- Rhode Island on June 5 passed a new tax reform that goes into effect January 1, 2011, eliminating the optional flat-tax method of preparing individual income taxes, reducing the number of tax brackets from five to three, and lowering the top income tax rate, from 9.9% to 5.99%.
Other Individual Income Tax Developments
- Maine voters in June 2010 approved Question 1 by a margin of 61% to 39%, repealing a year-old law that would have replaced its four-rate income tax structure, which has a top rate of 8.5%, with a flatter income tax and a top rate of 6.85%. The new system would have taken effect January 1, 2010, but was suspended until the referendum. Maine thus reverted to its existing income tax structure.
- Washington voters in November 2010 rejected Initiative 1098, which would have instituted an income tax in the state butonly on high-income earners.
State Changes to Sales Taxes
Sales Tax Increases
- Arizona voters approved Proposition 100 in May by a margin of 64% to 36%, increasing the sales tax by one percentage point, from 5.6% to 6.6%, effective June 1, 2010. This is a temporary increase lasting three years, although a similar sales tax increase in 1983 was made permanent before it expired.
- Kansas in its Fiscal Year 2010 budget increased its sales tax rate from 5.3% to 6.3%, starting July 1, 2010.
Sales Tax Decreases
- Arkansas decreased its sales tax on groceries. They will now be subject to a 2% rather than 3% tax rate.
- Massachusetts approved a ballot initiative in November to eliminate its sales tax on alcohol sold in stores, effective January 1, 2011.
Other Sales Tax Changes
- California’s sales tax is scheduled to drop by 1 percentage point on July 1, 2011, as a temporary tax expires. Newly elected Gov. Jerry Brown (D) has proposed a ballot initiative to extend the tax.
- Click-through nexus/“Amazon” taxes. Colorado approved H.B. 1193, a tax law designed to compel out-of-state businesses to collect the state’s use tax from consumers. The law requires out-of-state online retailers to identify their in-state customers, with costly non-compliance penalties. As predicted, upon enactment of this law, out-of-state retailers terminated affiliate relationships within the state and some have launched a legal battle to challenge the law. A similar regulation in North Carolina has been invalidated on First Amendment grounds. New York, Rhode Island, and North Carolina have standard Amazon taxes that impose the obligation directly. The legal fight over New York’s law continues.
- Sales tax holidays. Nineteen states held sales tax holidays for 2010 (Alabama, Connecticut, Florida, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Mississippi, Missouri, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Vermont, Virginia and West Virginia). This compares to 16 states in 2009 and 17 states in 2008. Compared to 2009, four states added a holiday (Florida, Illinois, Maryland, and Massachusetts) and one state dropped its holiday (Georgia). Some sales tax holidays apply broadly to all purchases, but most are targeted to exempt clothing, school supplies, computers, or Energy Star products.
- Legalizations. Rhode Island legalized fireworks on June 14 ahead of July 4, a move that boosted sales tax revenue by approximately $500,000.
State Changes to Corporate Income Taxes
Rates
- Kansas reduced its corporate income tax rate from 7.05% to 7.00%, effective tax year 2011.
- Massachusetts reduced its corporate income tax from 8.75% to 8.25%, effective tax year 2011. It will drop further to 8.0% in 2012.
- Ohio’s corporate franchise tax completed its five-year phaseout in 2010, being replaced in full by the Commercial Activities Tax (CAT) on gross receipts.
Other
- Iowa’s Supreme Court agreed with a Department of Revenue ruling imposing the state’s corporate income tax on businesses with sales in Iowa but no property or employees in Iowa. Generally, states adhereto a “physical presence nexus” rule for their corporate income tax.
- Connecticut implemented a broad version of this economic nexus standard in January 2010, without limits to particular types of activity or including a de minimis threshold.
- Washington also adopted an economic nexus standard in June 2010 for its Business & Occupation (B&O) gross receipts tax.
State Changes to Excise Taxes
Cigarette Taxes
The federal cigarette tax is $1.0066 per pack of 20 cigarettes, and each state levies a tax in addition to this. Seven states have increased cigarette taxes so far in 2010, compared to 18 states in 2009. Hawaii is the only state to raise the tax in both 2009 and 2010, and will raise it again to $3.20, effective July 1, 2011.
- Hawaii: from $2.60 to $3.00
- Minnesota: from $1.50 to $2.46
- New Mexico: from 91 cents to $1.66
- New York: from $2.75 to $4.35
- South Carolina: from 7 cents to 57 cents
- Utah: from 70 cents to $1.70
- Washington: from $2.025 to $3.025
Taxes on Soda
- Colorado in May removed sugared beverages and candy from the list of groceries that were exempt from the sales tax.
- Mississippi is also considering legislation to tax syrup used to sweeten soda at the distributor level.
- New York again considered a tax on sugary sodas, attracting much national attention before the idea was shelved in March.
- Washington enacted a new soda tax, adding 2 cents to every 12 oz. can, and extended the sales tax to candy, but voters repealed it at the ballot box. (Tax increases on beer and phones lines remain in effect.)
- The District of Columbia also considered a soda tax, but ultimately removed soda from the list of exempt groceries.
Gasoline Taxes
Many states regularly adjust gasoline excise tax rates with changes in inflation and prices. These minor changes are excluded from this list.
However, a notable change in this regard was in Nebraska, where the combined gasoline taxes rose to 28 cents per gallon (up 0.3 cents) from July 1, 2010 to December 31, 2010, and will drop to 27.3 cents effective January 1, 2011.
- California reduced its state sales tax on gasoline (separate from the gasoline excise tax) from 8.25% to 2.25% (excluding local sales taxes and state revenue directed to local governments), replacing it with an increase of 17.3 cents in the gasoline excise tax, to 35.3 cents per gallon. This complex “gas tax swap” took effect on July 1, 2010, for the purpose of negating a ballot approved requirement to spend on public transit the revenue from the state sales tax on gasoline.
- Minnesota’s gasoline excise tax went up slightly from 27.1 cents to 27.5 cents, effective July 1, 2010. It will go up further to 28.0 cents on July 1, 2011.
- Oregon’s combined gasoline taxes go up from 25 cents to 31 cents on January 1, 2011.
Multistate Lotteries
Eleven states (Georgia, Illinois, Maryland, Massachusetts, Michigan, New Jersey, New York, Ohio, Texas, Virginia, and Washington) began selling Powerball tickets in 2010, following a cross-selling agreement between the two multistate jackpot games Powerball and Mega Millions, bringing the total number of Powerball states to 42. California is the only state with a lottery that is not participating.
In addition, 29 states joined Mega Millions: Arizona, Arkansas, Colorado, Connecticut, Delaware, Idaho, Indiana, Iowa, Kansas, Kentucky, Maine, Minnesota, Missouri, Montana, Nebraska, North Carolina, North Dakota, New Hampshire, New Mexico, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Vermont, Wisconsin and West Virginia.
The only lottery states not participating in Mega Millions are Florida and Louisiana. In tax terminology, the “profit” generated when states monopolize gambling operations is best categorized as a selective sales tax on the tickets.
Other State Tax Changes
Film Tax Credits
State governments have paid billions of dollars in tax incentives to motion picture and television production companies over the past decade, with the number of states offering such programs growing dramatically from five in 2002 to 44 in 2009. The year 2010 saw the first-ever decline, as four states (Arizona, Iowa, Kansas, and New Jersey) suspended or ended their programs. The Wisconsin program has also been severely capped, with a $500,000 limit. Other states, notably Rhode Island, considered similar suspensions or eliminations but did not enact them. At the same time, urged by Gov. Bob McDonnell (R), Virginia added a $2.5 million program to begin in 2011.
State officials are increasingly recognizing that film tax credit programs do not pay for themselves, routinely overstate their economic and job creation benefits, have great potential for abuse and waste, and are a priority for government spending. It has also become increasingly difficult to outbid a few states with preposterously generous programs (particularly Louisiana, Michigan, and New York) for productions. A Tax Foundation report in early 2010 outlined these issues.
Energy Taxes
- Hawaii enacted a $1 per barrel tax on all petroleum products imported into the state, for the purposes of funding alternative energy development and food safety.
- Wyoming will be placing a tax on wind energy beginning in 2012. The Wyoming Legislature passed a $1 per megawatt hour wind energy generation tax and allowed a sales tax exemption for renewable energy projects to expire at the end of 2011.
Estate Taxes
- Hawaii in June re-enacted its estate tax, which had been dormant since 2005. On April 30, the Legislature overrode a veto by Governor Linda Lingle (R) and imposed a tax on estates of Hawaii residents over $3.5 million ranging from 0.8% to a 16% rate on estates over $10.1 million. Nonresidents receive a reduced exemption, paying estate tax on as little as $60,000 of property.
- Rhode Island raised its exemption level from $675,000 to $850,000, effective January 1, 2010.
For links, studies, and more articles, please see The Tax Foundation website.
For help in state tax planning, contact us or call us at 404-944-3172.
