The states' conformity to follow the federal lead and extend the filing and tax payment deadlines to July 15, 2020, has affected states’ abilities to meet fiscal budgets. The true financial impact continues to unfold. According to the Center on Budget and Policy Priorities, the state budget shortfalls are estimated to be approximately 15% for fiscal 2020 and more than 25% for fiscal 2021. State legislative sessions either were suspended, ended or will end soon. Only a handful of states have sessions extending into fall. While states are learning to conduct business remotely, their ability to do so has been hindered due to unpreparedness and, in some instances, laws requiring in-person meetings. Therefore, at this time, states may have limited capability to operate, let alone legislate change. Times are certainly uncertain. What does this mean for state taxpayers?
Tax increases
The New York State Assembly and Senate introduced nearly identical bills to increase income tax rates imposed on individuals, with new tax brackets created for taxable income over $90,000. The bills target the wealthy to raise their rates above the current 3.4% for taxable income exceeding $500,000. The highest graduated rate increases to 10.32% on taxable income greater than $100 million. Both bills were referred to their respective committees for further consideration.
Illinois voters will have a question on their Nov. 3, 2020, ballot regarding a constitutional amendment to adopt graduated tax rates as opposed to the current flat tax rate of 4.95%. If voters approve the amendment, taxpayers with incomes above $250,000 can expect their tax rate to increase to 7.75%. Individual rates would cap at 7.95% for those with income greater than $1 million. C corporations could see their rate go up to 10.45% from 9.5%.
States’ responses to the CARES Act
Approximately 22 states including the District of Columbia have not yet adjourned their 2020 legislative sessions. Several legislative sessions were suspended and, as of May 31, 2020, two states will hold special sessions in June. As the states attempt to balance their budgets by cutting expenditures, it is possible more states will join New York and Illinois and attempt to raise tax rates or pass other legislative measures to combat their fiscal crises.
States with rolling conformity to the Internal Revenue Code (IRC) will automatically conform to the Coronavirus Aid, Relief, and Economic Security (CARES) Act unless the state decouples as New York did. Other jurisdictions with rolling conformity that have not decoupled from the CARES Act include Alabama, Colorado, District of Columbia, Illinois, Maryland, New Jersey, Pennsylvania and Tennessee (not an all-inclusive list). Any state with a conformity date prior to March 27, 2020, will need to either 1) adopt in full or in part, or 2) decouple in full or in part from the IRC. Wisconsin adopted only specific sections of the CARES Act and New York as noted above decoupled in full.
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