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1、State tax policy:potential impacts of the 2024 electionThe outcomes of recent federal and state elections are likely to significantly impact state fiscal conditions and tax policy decisions in the coming years.2State tax policy:potential impacts of the 2024 election3State tax policy:potential impact

2、s of the 2024 electionExecutive and legislative racesWhile most attention has been focused on the federal elections with 34 Senate seats,all House seats and the presidency up for election significant state elections and ballot measures also will be decided.Eleven gubernatorial races will be decided,

3、with at least eight states poised to welcome a new governor due to term limits or an incumbents decision not to seek re-election.Such changes in state executive leadership are likely to bring new directors of state departments of revenue and economic development,potential shifts in tax and economic

4、policy,and tax reform proposals driven by the executive branch.Legislative elections will be held in 44 out of 50 states,deciding approximately 5,800 legislators(79%)in 85 of the nations 99 state legislative chambers.With these elections will come changes in legislative leadership,new chairs of stat

5、e tax-writing committees,and new lawmakers contributing to tax policy decisions across the country.Ballot measuresSeveral states empower their residents to create law directly through ballot initiatives,including decisions on state tax policy.While several important state tax-related measures are on

6、 the ballot this election cycle,a few stand out as especially significant.If approved,Oregon Measure 118 would impose a new 3%minimum tax on corporations Oregon gross sales exceeding$25 million,beginning in 2025(see Tax Alert 2024-1250).San Francisco Measure M,if approved,would substantially revise

7、the citys business taxes beginning next year,including rate changes and how several of the taxes are calculated(see Tax Alert 2024-1825).Other measures would implicate future tax policy decision-making.Measures in Washington would repeal the states capital gains tax,I-2109,and prohibit the implement

8、ation of state carbon cap and trade and carbon tax programs,I-2117,which may reduce current education,transportation and environmental infrastructure spending.Elsewhere,an Illinois advisory question will gauge taxpayer appetite for a 3%surtax on individual income exceeding$1 million to lower propert

9、y taxes.111gubernatorial races will be decided.79%of legislative seats will be decided.2024 state elections1 For more information on state ballot measures to be decided this election cycle,see Tax Alert 2024-1941 and 2024-1951.4State tax policy:potential impacts of the 2024 electionChanges in state

10、executive and legislative leadership will coincide with factors that could lead to a year of substantial state tax policy discussions.All 50 state legislative bodies will be in session in 2025 and must pass new budgets.All those states,except Vermont,have some form of balanced budget requirement ens

11、hrined in law,which will require lawmakers to balance spending priorities against revenue raising.Further,both federal policymaking and state fiscal concerns may complicate the state policy landscape moving into next year.Tax Cuts and Jobs Act implicationsSince the enactment of the Tax Cuts and Jobs

12、 Act(TCJA)in 2017,state lawmakers have been refining their policies on federal income tax conformity,selectively choosing which TCJA provisions to adopt or reject for purposes of calculating state income.Several states have also created special tax regimes for pass-through entities,which are largely

13、 viewed as a strategic response to the TCJAs limitation on state and local deductions.More recently,state lawmakers have been grappling with some of the delayed aspects of the TCJA,including provisions that phase down full expensing and changes to the deductibility of expenses for R&D and interest.W

14、ith large portions of the TCJA set to sunset in 2025,the results of the 2024 federal elections will determine the path forward for federal tax policy.However,state elections and the ensuing legislative sessions will ultimately shape how states align with or diverge from federal tax policy moving for

15、ward.Implications for 2025State conformity to key TCJA provisionsIRC*Section 168(k)Most states decouple from federal“bonus”depreciation provisions.IRC Section 163(j)Most states conform to the TCJAs IRC Section 163(j)business interest expense limitation.IRC Section 174 Most states conform to the amor

16、tization of research and experimentation costs beginning in 2022.*Internal Revenue Code5State tax policy:potential impacts of the 2024 electionState fiscal conditionsWhile most states have seen substantial revenue growth in recent years,fiscal year 2024 running from July 2023 to June 2024 saw a 0.7%

17、average increase in inflation-adjusted state revenues,with 33 states reporting declines in revenue.Percent change in inflation-adjusted state tax revenuesYear-over-year percent change,6-month moving averages June 2024 vs.prior year Overall adjusted state revenue up 4.4%Personal income tax:10.8%Corpo

18、rate income tax:15.7%Sales and use tax decrease:-4.0%JulyJune 2024 vs.prior year Overall adjusted state revenue up 0.7%33 states showed net declines in inflation-adjusted revenue,four reporting double-digit declines Personal income tax:2.7%Corporate income tax:4.9%Sales and use tax decrease:-2.0%Jun

19、-19Sep-19Dec-19Mar-19Jun-20Sep-20Dec-20Mar-21Jun-21Sep-21Dec-21Mar-22Jun-22Sep-22Dec-22Mar-23Jun-23Sep-23Dec-23Mar-24Jun-240%10%20%30%40%50%-10%-20%-30%Total taxSales taxPersonal incomeState Revenue Reporting:June 2024Source:Monthly State Revenue Highlights,Urban Institute,August 2024.2 See,Lucy Dad

20、ayan,Urban Institute,“Monthly State Revenue Highlights:Income Tax Gains but Sales Tax Losses in July,”September 2024.6State tax policy:potential impacts of the 2024 electionSeveral states also continue to face impending revenue shortfalls.California,Illinois,Louisiana,Maryland and New York all face

21、deficits and will be required to make difficult spending reductions or revenue raising decisions in 2025.Federal fund transfers to the states will also continue to dissipate in 2025 following a surge in federal outlays to states over the past four years.$857$657$547$866$793$591$904$1,101$655$1,042$1

22、,084$658$1,136$1,060$74820192020202120222023$39$2,100$2,290$2,704$2,844$2,989$40$44$60$45Total US state expenditures,FY 2019 to FY 2022 actuals and FY 2023 estimates,in$b In FY 2021,state expenditures were$2.7 trillion,an 18%or$412b increase from the FY 2020 actuals of$2.3t.During the pandemic,$307b

23、 of the$412b increase in the total expenditure was driven by an increase in federal funds associated with COVID-19 aid in FY 2021.The estimated total federal fund expenditure was$1,084b in FY 2022 and estimated to decline by 2%to$1,060b in FY 2023.Source:2023 State Expenditure Report,National Associ

24、ation of State Budget Offices,2023.Due to additional federal funding and unexpected tax receipts,state and local governments increased spending during the pandemic General funds Federal funds Other state funds Bonds7State tax policy:potential impacts of the 2024 electionThe 2024 state elections will

25、 play a critical role in establishing the state tax policy landscape moving into 2025.All states will be grappling with constrained revenues and reductions in federal funding compared with prior years,all while new executive and legislative leaders and lawmakers navigate the complex tax policy envir

26、onment.The results of the federal elections are also likely to impact state tax policy,as national leaders make decisions on state funding and federal tax policy.This includes decisions on tax extenders,expiring TCJA provisions and new tax priorities from the next president,such as decisions on inte

27、rnational tax provisions and the taxability of tips or overtime all of which may necessitate state conformity choices.Provision202120222023202420252026RevenueTCJA“pre-cliffs”Through 202512025-20342Interest deduction based on EBITDAEBIT-$18.8bR&D expensingFive-year amortization(15-year for foreign R&

28、D)-$8.5b100%expensingPhased down in 20%increments-$3.05b-$378bTCJA international provisionsGILTI deduction at 50%37.5%deduction-$120bFDII deduction at 37.5%21.875%deductionBEAT rate:10%(11%for banks/dealers)12.5%/13.5%rate-$21bTCJA individual provisionsIncome tax rates 10%,12%,22%,24%,32%,35%,37%10%

29、,15%,25%,28%,33%,35%,39.6%-$2.16tStandard deduction$12,000/single,$24,000/married$6,350/single,$12,700/married-$1.25tAMT exemption$81,300/single,$126,500/married$54,300/single,$84,500/married-$1.36tChild tax credit:$2,000,refundable to$1,400$1,000,$1,000 refundability-$748b20%pass-through deductionN

30、o deduction-$684bEstate(currently$12.92m)and Gift Tax Exemptions$5.49m(pre-2018$5m inflation adjusted)-$167bSALT deduction cap$10,000No SALT deduction cap+$1.2t3Other issuesTax extenders CFC look-through,WOTC,NMTC,etc.Extenders expire-$66bExpanded ACA Premium Tax CreditsCredit amounts reduced,limite

31、d to incomes below 400%of FPL-$335b In effectNot in effect1 Joint Committee on Taxation(JCT),JCX-3-24,Estimated Revenue Effects of H.R.7024,The Tax Relief For American Families and Workers Act of 2024,January 20242 Congressional Budget Office(CBO),Budgetary Outcomes Under Alternative Assumptions Abo

32、ut Spending and Revenues,Supplemental Data,May 20243 Tax Foundation estimateThese factors in combination will lead to a busy 2025 state legislative cycle teeming with significant and potentially controversial tax policy proposals.ConclusionEY|Building a better working worldEY is building a better wo

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37、&Young Global Limited operating in the US.2024 Ernst&Young LLP.All Rights Reserved.US SCORE no.25027-241USCSG no.2410-10171 ED NoneThis material has been prepared for general informational purposes only and is not intended to be relied upon as accounting,tax,legal or other professional advice.Please refer to your advisors for specific