Introduction
The June solstice has come and gone, officially ushering in the summer season and marking the conclusion of most state legislative sessions. As this time of the year unfolds, numerous states are initiating policy modifications that were enacted during this year’s legislative session or are being phased in gradually.
Implementation Timing
The majority of state individual and corporate income tax policy changes are effective from January 1, ensuring consistency throughout the tax year. Conversely, many sales and excise tax changes take effect on July 1, coinciding with the fiscal year’s commencement for most states, excluding Alabama, Michigan, New York, and Texas.
Notable Tax Policy Changes as of July 1, 2023
On July 1, 2023, a considerable number of significant tax policy changes are slated to take effect across 18 states, ranging from sales tax rate reductions to the implementation of new taxes. Let’s take a closer look at some of these changes:
Sales Tax Rate Reductions
New Mexico and South Dakota are set to experience sales tax rate reductions. Both states will witness a decrease in their sales tax rates, signifying a positive development for consumers and businesses alike.
Corporate Franchise (Capital Stock) Tax Repeal
Oklahoma has made the decision to repeal the corporate franchise tax, also known as the capital stock tax. This move aims to alleviate the burden on corporations, fostering a more favorable business environment within the state.
Implementation of Payroll Tax
Washington will implement a payroll tax starting July 1, 2023. This tax is designed to fund a mandatory long-term care insurance program, with the intention of providing support for individuals requiring long-term care services.
Taxes on Newly Legalized Cannabis Products
Maryland and Minnesota will be introducing taxes on the sales of newly legalized cannabis products. With the recent legalization of cannabis, these states have deemed it necessary to implement taxes to regulate and generate revenue from this emerging industry.
Retroactively Effective Tax Policy Changes
Across 11 states, a total of 22 notable tax policy changes have been enacted or phased in during the current year, with retroactive effectiveness starting from January 1, 2023. These changes include income tax reductions in Arkansas, Michigan, North Dakota, Utah, and West Virginia. Although retroactive, they have a significant impact on taxpayers in these states.
Summary
The tax policy changes mentioned above provide a comprehensive overview of the structural reforms and noteworthy modifications taking place at the state level. While this report does not cover every minor adjustment, credit, exemption, or administrative procedure change, it focuses on the major alterations, such as rate adjustments, new tax implementations, and changes to tax bases that affect a substantial portion of taxpayers.
State-Specific Changes
Income Tax Changes in Indiana
Indiana has enacted Senate Bill 417 in May, which will take effect on July 1. This bill allows Indiana counties to adopt local income taxes to cover county staff expenses associated with the state’s judicial system. Notably, any local tax rate must be levied incrementally in one-hundredth of one percent (0.01%), not exceeding two-tenths of one percent (0.20%). Additionally, the tax may remain in effect for a maximum of 25 years.
Payroll Tax Changes in Washington
In Washington, a 0.58% payroll tax will become effective on July 1, 2023. This tax will finance a mandatory long-term care insurance program, following legislative changes and delays resulting from litigation. The underlying law enabling this tax and program was initially enacted in 2019.
Sales and Use Tax Changes
Illinois
Illinois’ one-year sales tax exemption for groceries, which was part of the Family Relief Plan and implemented in 2022, is set to expire at the end of the second quarter. Starting July 1, Illinois will resume collecting a sales tax on groceries, albeit at a preferential rate of 1%, significantly lower than the statewide general sales tax rate of 6.25%.
Indiana
Effective July 1, Indiana will expand its sales tax exemption for nonprofit organizations selling tangible personal property. Previously, nonprofits were exempt from collecting sales taxes if their annual sales were $20,000 or less. However, under the newly enacted S.B. 417, nonprofit organizations with sales totaling $100,000 or less will no longer be required to collect sales taxes on otherwise taxable sales.
New Mexico
New Mexico will experience a phased reduction in its sales tax, known as the gross receipts tax (GRT), starting July 1. The tax rate will be reduced from 5% to 4.875%, following a law enacted in 2022 that aimed to decrease the rate from 5.125% to 4.875% over a two-year period. While a proposal to further reduce the rate to 4.5% this July and 4.375% next July was vetoed, the governor did approve an expansion of the GRT deduction for medical services, which will be effective from July 1.
South Dakota: Sales Tax Rate Reductions and Economic Nexus Threshold Update
South Dakota, a state known for its tax policy innovations, has recently enacted significant tax reforms. These changes aim to simplify tax laws, reduce compliance burdens, and enhance economic competitiveness.
South Dakota Sales Tax Rate Reduction
House Bill 1137, passed in March, brings about a rate reduction in South Dakota’s statewide sales tax. Starting July 1, 2023, the sales tax rate will decrease from 4.5 percent to 4.2 percent. This rate reduction will remain in effect for four years, expiring on June 30, 2027. The reduction in sales tax is a positive development for both consumers and businesses, fostering economic growth and incentivizing purchases.
Economic Nexus Threshold Update
Senate Bill 30, enacted in February, modifies South Dakota’s sales tax economic nexus statute for remote sellers. Previously, remote sellers were subject to the 200 transactions threshold, as established by the 2016-enacted law that gained attention in the South Dakota v. Wayfair case. However, effective July 1, 2023, this threshold is eliminated. Only remote sellers with more than $100,000 in gross sales in South Dakota will now be required to register with the state, collect, and remit sales taxes. This amendment simplifies the tax compliance process for remote sellers, aligning with the evolving landscape of economic nexus laws across the United States.
Property Tax Changes in Indiana
Indiana has introduced property tax changes through Senate Bill 46, which will become effective on July 1, 2023. This legislation allows Indiana counties to provide a county option circuit breaker tax credit. The tax credit is designed to offset qualifying individuals’ property tax liability, providing financial relief and support for property owners.
Corporate Franchise (Capital Stock) Tax Repeal in Oklahoma
Oklahoma has implemented business tax reforms with the adoption of House Bill 1039 in May. As part of these reforms, the state’s corporate franchise tax, also known as the capital stock tax, will be repealed. Effective July 1, 2023, this tax will no longer be levied on corporations operating in Oklahoma. The repeal of the corporate franchise tax reduces the tax burden on businesses and contributes to creating a more favorable business environment within the state.
Tobacco, Vapor, and Cannabis Tax Changes in California, Idaho, Maryland, Minnesota, and Tennessee
Several states have made changes to their tobacco, vapor, and cannabis tax policies. Let’s take a closer look at these changes:
California
Effective July 1, California will adjust the tax rate on other tobacco products (OTP), including vapor products. The tax rate will change from 61.74 percent to 56.32 percent of the wholesale cost. This adjustment is necessary to maintain parity with the state’s cigarette tax rate, which has been $2.87 per pack of 20 since 2017. The automatic reduction in taxes on OTP ensures consistency in tax rates and aligns with the state’s overall tobacco tax structure.
Idaho
Starting July 1, Idaho will implement a tax cap of $0.50 per cigar, as outlined in H0330 enacted in April. Currently, cigars are subject to a combined tax rate of 40 percent of the wholesale sales price, with two separate taxes of 35 percent and 5 percent imposed. The introduction of the tax cap will limit the taxes collected on cigars with a wholesale sales price exceeding approximately $1.25 per cigar.
Maryland
With the passage of H.B. 556 in May 2023, Maryland has legalized the recreational use of marijuana. Commencing retail sales on July 1, an excise tax will be imposed on the retail price at a rate of 9 percent. This taxation framework allows the state to generate revenue while regulating the legal cannabis market.
Minnesota
Minnesota has also legalized recreational marijuana with the enactment of H.F. 100 in May. Starting July 1, sellers of cannabis products must register with the state and collect a new cannabis tax. The tax will be levied at a rate of 10 percent on the retail sales price. The taxation of recreational cannabis aligns with the state’s efforts to regulate the industry and capture revenue from this emerging market.
Tennessee
SB 0378, enacted in May, will introduce a new 6 percent tax on retail sales of hemp-derived cannabinoids, including THC and CBD. This tax will be in addition to the statewide general sales tax rate of 7 percent and any applicable local option sales taxes. The introduction of this tax ensures consistency in the taxation of cannabis-related products and supports revenue generation for the state.
Sports Betting Tax in Tennessee
Tennessee, following the legalization of sports betting in 2019, has enacted SB 0475, which imposes a new privilege tax on sportsbook operators. Effective July 1, 2023, the tax will amount to 1.85 percent of the total gross wagers. This tax structure provides a revenue stream for the state while regulating the sports betting industry.
Transportation Tax Changes in California, Colorado, Illinois, and Indiana
Several states have implemented tax changes affecting transportation-related taxes. These changes are summarized below:
California
The California Department of Tax and Fee Administration has increased the Oil Spill Prevention and Administration (OSPA) fee. Effective July 1, 2023, the fee will rise from $0.085 to $0.091 per barrel for owners of crude oil, petroleum products, and renewable fuels. Additionally, starting July 1, 2023, the OSPA fee will annually increase based on the rate of inflation according to the California Consumer Price Index. These adjustments ensure adequate funding for oil spill prevention and administration efforts.
Colorado
Colorado is gradually implementing a “road usage fee” on gasoline and diesel fuel. On July 1, 2023, the fee on gasoline will increase from $0.02 to $0.03 per gallon, while the fee on diesel will increase from $0.04 to $0.06 per gallon. Furthermore, the “bridge and tunnel impact fee” paid by special fuel distributors will increase from $0.02 to $0.03 per gallon. These fees, in addition to the existing gasoline excise tax, contribute to funding transportation infrastructure and maintenance.
Illinois
Illinois will witness an inflation adjustment to its motor fuel tax from July 1, 2023, through December 31, 2023. The tax rate on gasoline will increase to $0.454 per gallon, up from $0.423 per gallon. Similarly, the tax rate on diesel will rise to $0.529 per gallon, up from $0.498 per gallon. These adjustments ensure adequate revenue for maintaining and improving the state’s transportation infrastructure.
Indiana
Indiana has published inflation-adjusted fuel tax rates for the upcoming fiscal year. Effective July 1, the gas tax will increase from $0.33 to $0.34 per gallon, and the special fuel license tax will increase from $0.55 to $0.57 per gallon. Furthermore, the biennial budget, enacted in May, diverts gasoline use tax revenue from the general fund to the state highway fund. These changes support funding for transportation initiatives and infrastructure development in Indiana.
Kentucky: Increase in Gasoline and Fuel Taxes
Kentucky is set to implement an increase in its tax rates on gasoline, petroleum, and special fuels starting July 1. The tax on gasoline will rise from $0.266 to $0.287 per gallon, while petroleum and special fuels will increase from $0.266 to $0.287 per gallon and $0.236 to $0.257 per gallon, respectively. These adjustments are based on changes in the average wholesale price (AWP) of gas. Kentucky’s excise tax is levied at a rate of 9 percent of the AWP before additional surcharges are applied. The law in Kentucky limits the annual increase or decrease in the AWP to 10 percent for gas tax calculation purposes.
Maryland: Increase in Fuel Taxes
Maryland will witness an increase in fuel taxes effective July 1, 2023. The state’s gas tax will climb to $0.47 per gallon, and the diesel tax will rise to $0.4775 per gallon. A 2013 law in Maryland mandates the state’s comptroller to determine the average fuel price and set the tax rates accordingly. The average price is typically based on data compiled by the Oil Price Information Service, considering the prices for regular unleaded motor fuel reported during the 12-month period ending on the last day of the second immediately preceding month. Currently, the fuel tax rate is set at 3 percent of the determined average fuel price.
Missouri: Scheduled Gas Tax Increase
Missouri’s gas tax is scheduled to increase from $0.22 to $0.245 per gallon on July 1. This increase is part of a legislative initiative enacted in 2021, aiming to raise the tax by $0.125 per gallon by July 1, 2025.
Montana: Electric Vehicle Charging Station Tax
Effective from July 1, 2023, Montana will introduce a tax of $0.03 per kilowatt hour or its equivalent on electric current from public electric vehicle charging stations. Existing public charging stations have until July 1, 2025, to install meters to collect the tax. To alleviate the tax burden on in-state electric vehicle owners, a reduction of 30 percent in electric vehicle registration fees will commence in 2028.
Utah: Gas Tax Reduction and Electric Vehicle Charging Station Tax
In March, Utah enacted House Bill 301, which reduces the state’s gas tax rate from $0.364 to $0.345 per gallon. Simultaneously, the bill imposes a new tax at a rate of 12.5 percent on retail sales of electric current from electric vehicle charging stations.
Virginia: Increase in Fuel Taxes
Virginia will witness an increase in fuel taxes, including the gas tax, which will rise from $0.28 to $0.298 per gallon, and the diesel tax, which will increase from $0.289 to $0.308 per gallon. The tax changes also extend to blended fuels.
Miscellaneous Tax Changes
Colorado: Road Usage Fee and Fees on Deliveries and Rideshares
Effective from July 1, Colorado will implement a road usage fee legislation, which includes additional fees of $0.27 on deliveries and $0.30 on rideshares.
Source: https://taxfoundation.org/