States are once again engaged in that familiar process of negotiating their budget for fiscal year 2021 – 2022. Many are still trying to find their way through the havoc either created or accelerated by the pandemic. It is easy to single out an isolated occurrence, such as the pandemic, as the culprit of budget deficits. However, the truth is that many states were already facing serious financial situations before the pandemic.
We typically look at a state budget from a one dimensional perspective, with that focus being on the portion of the budget that raises the revenue to run the government. However, the state budget is a multi-dimensional process that creates education, health and welfare, and economic programs intended to benefit the state’s residents. Naturally, all of these programs require money (i.e., tax revenue) to operate.
Amidst state budget negotiations and recently-enacted budgets, we are seeing trends such as higher individual tax rates imposed on high wage earners, an expansion of the sales tax base, the acceleration or real-time payment of sales tax, legalization of marijuana, and credits and incentive programs aimed to help businesses and industries severely impacted by the pandemic. If states do not adopt these changes for the long haul, they will be forced to cut funding to critical programs such as education and health care.
You may have seen articles that discuss how some states, such as California and Maryland, are seeing higher than expected revenues and projecting significant budget surpluses. However, the reality is that these states and many others are still facing a perilous financial situation in the years to come. The states that are doing well have benefited from progressive taxes and the surge in the stock market, creating gains that are subject to state taxes. These increases in state revenues are largely a one-time phenomenon buoyed by the rise in the stock market, federal stimulus that has resulted in the purchase of tangible goods, and state aid from the federal government to support certain healthcare costs.
States with a less progressive tax base that rely heavily on tourism and do not impose a personal income tax, such as Florida, Texas, and Nevada, have not fared as well during the pandemic. Florida, in particular, experienced an economic shortfall during these unprecedented times and had not adopted an economic nexus standard as a result of the Supreme Court decision in Wayfair prior to the pandemic. In an attempt to address this shortfall, Florida has now adopted economic nexus. Texas, on the other hand, was grateful that it had adopted economic nexus due to the additional $1 billion of sales tax collected during the pandemic.
As someone who has practiced in the area of state and local taxation my entire career and who has seen tax reform at the state level come and go, the changes we are seeing are not the result of a short-term phenomenon. The pandemic has merely exposed the longer-term considerations states must address in order to maintain current funding levels for state programs. Progressive taxes appear to be here to stay for the states that already have them and poised for adoption in those states where they do not exist. Businesses should always monitor the state tax landscape to identify opportunities to minimize state taxes, whether it be through the pursuit of credits and incentives or mobility to shift operations to a lower cost state.
Thomas M. Frascella can be reached at Email or 215.441.4600.
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