All the Major Tax Policy Legislation from 2023’s State Legislative Sessions

With most states adjourning their regular legislative sessions, MultiState’s Tax team has read nearly every bill impacting businesses over the last seven months. As such, we’ve seen some key legislation over this past session and can report on what they may indicate for next year’s tax trends. Most states continue to experience unprecedented revenue surpluses, but  few states tackled comprehensive tax reform. Many made modifications to their tax base, rate, or other administrative aspects of the code. Here is the major legislation of note from the 2023 sessions thus far.  

Corporate Income Tax

Taxation of Foreign Income

The New Jersey Corporate Business Tax (CBT) bill has been months in the making as a collaborative effort between the taxpayers and the New Jersey Treasury’s Division of Taxation. SB 3737 / AB 5323 makes a number of tax policy changes to New Jersey’s code: it would treat GILTI as exempt dividend income, establish a new nexus standard, and require the use of the Finnigan rule for apportionment instead of the Joyce rule (a change to their combined reporting filing requirements). As June 12, a controversial provision regarding the discretion of the Division to break up combined filing was amended out of SB 3737. The bill was signed by Governor Murphy (D) on July 3. 

Minnesota also tackled the issue of taxation of foreign income this year. Minnesota originally sought to introduce worldwide combined reporting into their omnibus bill (MN HF 1938 / MN SF 1811) with the intention that the provision would act as the bill’s main revenue raiser. However, in early May, worldwide reporting was dropped from the Senate version in favor of modifying the state’s treatment of Global Intangible Low-Taxed Income (GILTI). Prior to the enactment of HF 1938, Minnesota decoupled from GILTI, but effective for tax years beginning after December 31, 2022, Minnesota will tax GILTI and provide a 50 percent Dividends Received Deduction (DRD). HF 1938 was signed by Governor Walz (D) on May 24. 

Income Tax Apportionment

This year, the most persistent issue related to the corporate income tax was income tax apportionment. The 2023 session saw a range of reactions from legislators. Montana passed MT SB 124, which adopted single sales factor apportionment, early into the session. The bill was signed into law by Governor Greg Gianforte (R) on March 14, 2023. Tennessee also modified its apportionment method with HB 323. The bill largely implemented Governor Bill Lee's (R) budget plan and phased in single sales factor apportionment by December 31, 2025. 

If Massachusetts does not implement single sales factor this session, it would not be from lack of trying. This session, the lawmakers in the Bay State introduced MA SB 1803, MA SB 1951, MA SB 1887 all of which would adopt single sales factor apportionment. MA HB 3770 also proposed single sales factor for financial institutions, but the provision was recently amended out of the bill.

It appeared that New Mexico was about to do the same as Montana and Tennessee with NM HB 547, the state’s omnibus tax bill. It included numerous tax provisions — one of which required the use of single sales factor apportionment for business income. Even though the bill passed both chambers, Governor Lujan Grisham (D) line-item vetoed a large majority of the bill, including the single sales factor provision. The governor cited budget concerns as her reason for doing so. 

Finally, Kansas made an effort to adopt single sales factor with KS HB 2110, which would have adopted the provision for certain industries such as wireless communications carriers. The effort failed but may reemerge in future sessions.

Combined Reporting

Maryland is no stranger to making headlines in the tax press, so it may not come as a surprise that MD HB 46 / MD SB 576 garnered much attention. These bills sought to put in place combined reporting requirements using the water’s edge method. It’s very likely this issue will come up again next year as it seems to be a perennial conversation in Maryland. 

Corporate Income Tax Rates

Over the past few years, corporate income tax trends have been dominated by states looking to reduce the corporate income tax, and Arkansas and Utah followed suit in 2023. Freshman Governor Sarah Huckabee Sanders (R) signed AR SB 549 into law, which reduces the corporate income tax from 5.3 percent to 5.1 percent. Likewise, Utah Governor Cox (R) signed UT HB 54 into law, which reduces the corporate income and franchise tax rate from 4.85 to 4.65 percent. Both of these bills take effect for the 2023 tax year. 

On the other hand, New York State is bucking the trend with NY SB 4009 / NY AB 3009. As part of the state’s budget bill, policymakers sought to extend a surcharge to the corporate income tax rate of 0.75 percent for certain large entities and also extend the state’s capital base tax rate of 0.1875 percent through 2026, which was slated to expire. After much debate and negotiations, these extensions were signed into law along with the rest of the budget on May 3, 2023. The state’s willingness to return to tax increases may signify concern about the state’s revenue collections in future years. 

Data Taxes

As legislators focus on the role of data in society more broadly, legislators were also considering the potential tax implications of data collection. New York SB 2012 was proposed by Senate Finance Chair Senator Liz Krueger (D). The bill sought to create an excise tax on the collection of consumer data by for-profit businesses. Likewise, Illinois SB 2307 introduced the Commercial Data Collector Tax Act, a monthly excise tax on the collection of the consumer data of individual consumers by commercial data collectors starting at a rate of 5 cents per customer. The bill was sponsored by Revenue Committee Chair Celina Villanueva (D). Neither bill found much traction, but we’re likely to see similar legislation again in New York, Illinois, and elsewhere. 

Maryland’s Digital Tax

Despite passing the legislature in 2021, Maryland’s Digital Advertising Tax is still making news. As a refresher, companies with global annual gross revenues equal to or greater than $100 million are taxed between 2.5% and 10% on the portion of their revenues that come from digital advertising services in the state. The fact that this tax is the first of its kind has garnered a considerable amount of attention from across the country. Litigation has been ongoing, and in October, Maryland’s Anne Arundel County Circuit Court heard the matter. The court agreed that the tax is unconstitutional and struck it down. However, the state appealed to the state supreme court, which issued an order requiring the parties to exhaust all administrative remedies before the constitutional challenge could proceed. As a result, expect legal challenges to continue in Maryland.

Additionally, a coalition of business entities, which notably included the U.S. Chamber of Commerce, sued Maryland in federal court alleging that the digital ad tax violated the first amendment. The court eventually dismissed the case once the Maryland circuit court ruled the tax unconstitutional. The business associations appealed to the Fourth Circuit Court of Appeals where the case presently sits.

Tax Credit Reform

Florida HB 5 was signed into law on May 31. The bill eliminated "Enterprise Florida" which was a partnership between the state and businesses that is meant to promote economic development and business recruitment in the state through the use of varying initiatives. The bill also repealed several economic development programs such as the Qualified Target Industry Tax Refund Program, and the Qualified Defense Contractor and Space Flight Business Tax Refund Program. 

Property Tax Reform

The Texas legislature has been called into two special sessions since adjourning their regular session in order to tackle property tax reform. Since then, several bills have been introduced. A number of them center on property tax reform (e.g., whether to reduce the state’s compression rate, cap property assessments, extend exemptions to homesteads, and repeal the property tax altogether). This created a considerable amount of tension between the House which backs Governor Greg Abbott’s (R) approach of an outright tax repeal, and Lt. Governor Dan Patrick who prefers homestead exemptions. After a monthslong standoff among Texas’ top Republicans, state GOP lawmakers finally struck a deal Monday on how to cut Texans’ property taxes. The new property tax relief bill (HB 2), a franchise tax relief bill (HB 3) and the constitutional amendment (HJR 2) required to enact the cuts were filed Monday.  The legislation reduces the school property tax rate by 10.7 cents per $100 valuation for homeowners and business properties. It also institutes a three-year, 20% cap on appraisal increases for commercial and non-homesteaded properties valued at $5 million or below — a number that could be adjusted by the comptroller with inflation each year. Both the House and the Senate are expected to schedule floor votes on the package on Thursday, and Gov. Abbott plans to approve it. Voters must pass the plan in a constitutional election in November for it to take effect in the 2023 tax year.

What to Expect for Tax Policy in 2024?

Of course, the failure of bills in the 2023 legislative session doesn’t mean those ideas aren’t coming back in next year’s legislative sessions. And with state revenue projections coming back to realistic levels from historical peaks, we’re likely to see pushes to increase tax revenue. And it’s likely that states will continue to scrutinize tax incentives considering the aversion that state houses have developed to the same ESG priorities many corporations have embraced. 

Track State Tax Legislation

MultiState’s team actively identifies, categorizes, and tracks all tax policy legislation so that organizations, their government affairs teams, and other internal stakeholder teams have the information they need to navigate and effectively engage. If your organization would like to further track these and other tax policy issues, please contact us.