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States approve numerous tax-related measures in the Midterm Elections 2014

Several states approved tax-related measures in this midterm election. These include a constitutional ban on income tax, an income tax cap, and a millionaire tax.

Tennessee: no income tax

Voters approved Amendment 3, a prohibition on state and local taxation of payroll or earned personal income. The measure prohibits any state or local tax measured by payroll or earned personal income by way of amending Tennessee’s constitution.

Though Tennessee still taxes individual income in the form of interest and dividends, the state was already one of several without a tax on wages and salaries. This is one reason why it ranks so high, number eight, in the individual income tax component of the Tax Foundation’s 2015 State Business Tax Climate Index (Index).

A little more than a month before the election, a Knoxville News Sentinel article quoted State Sen. Brian Kelsey, R-Germantown, the sponsor of the resolution putting Amendment 3 on the ballot, as hopeful. He reasoned that “[n]ot having a state income tax has already brought jobs to Tennessee, and being able to tell employers we’ll never have one is going to bring even more jobs.”

On the other hand, the leader of “Citizens for Fiscal Sanity,” Dick Williams, opined that Amendment 3 “would limit the options of future generations and lead to higher taxes on sales and property.”

Of the Tax Foundation’s 10 “best states” in its index, six of them have no income tax: Alaska, Florida, Nevada, South Dakota, Texas, and Wyoming. The other state with no income tax, Washington, holds the number 11 position. New Hampshire and Tennessee, numbers seven and 15, respectively, are the only two states to tax only interest and dividends. The Index’s "overall rank" takes into account a state’s corporate, individual income, sales and unemployment insurance tax rankings.

Georgia: marginal income tax capped at 6%

Georgia voters approved constitutional Amendment #1, which prohibits the General Assembly from increasing the maximum state income tax above the current top rate of 6%.

Prior to Election Day, Americans for Tax Reform (ATR) reported that Republican State Senator David Shafter proposed the cap because it “helps increase our competitiveness by pointing out to businesses making expansion decisions that while other states could increase their rates tomorrow, our rates are constitutionally capped.” University of Georgia professor Jeffrey Dorman agreed: “It’s the credibility thing: If businesses feel like they can trust you, then they’re more likely to create jobs in your community. So this cap signals to businesses, we promise we’re not going to become New York or California or Illinois. We’re going to stay a good place to do business.”

In contrast, the Pew Charitable Trusts highlighted a different perspective from Wesley Tharpe, tax and economic policy analyst for the Georgia Budget and Policy Institute. He suggested that locking in a low tax rate might be bad for the state in the future. While recognizing that Georgia has embraced having low taxes, some of the lowest in the country, Mr. Tharpe also acknowledged the state’s congested roads and underfunded healthcare and education systems.

The Tax Foundation’s Index ranks Georgia at #36 overall, one notch lower than last year’s ranking.

Illinois: nonbinding approval of a millionaire’s tax

A post-election CNN.com story addressed the millionaire tax referendum question that was on the ballot in Illinois. It pointed out that Illinois voters favored the idea of imposing a 3% tax on personal income exceeding $1 million, which would increase school funding.

The Chicago Tribune acknowledged that while this was merely a ballot question that does not carry the power of the law, the electorate supports the millionaire’s tax despite a failed effort to amend the constitution by increasing income taxes for millionaires by the House Speaker Michael Madigan. Illinois currently imposes a flat income tax rate, and some Democrats have proposed altering the state constitution to allow for multiple sets of gradually higher rates, as is done in the federal income tax system.

The CNN.com story indicated that even if Speaker Madigan re-introduces the legislation, it is unlikely to go anywhere because newly elected Governor Rauner, a Republican, is not likely to back it.

The Tax Foundation’s Index ranks Illinois # 31 overall. It explains that in 2011, Illinois sharply raised individual and corporate income taxes in an attempt to mitigate budget problems. What is not reflected in its 2015 rank is that the tax hikes are scheduled to be temporary and partially sunset at the beginning of tax year 2015.

Additionally, in 2015, the individual income tax is scheduled to decrease from 5% to 3.75%, and the corporate tax is scheduled to decrease from 9.5% to 7.75%.

Three more states legalize marijuana in the 2014 midterms

According to a DemocracyNow.org headline, voters in the midterms rejected the war on drugs in the U.S. by legalizing marijuana in three more states. Oregon and Alaska joined Colorado and Washington to make marijuana available for adults to buy in retail shops. In the District of Columbia, voters approved an initiative that makes it legal for adults to possess two ounces of marijuana and grow up to six marijuana plants in their homes.

Alaska

In The Daily Chronicle, a recap article (Recap) announced that Alaska voters approved of Measure 2 by a 52 percent majority.

As we recently reported, Measure 2 taxes and regulates the production, sale, and use of marijuana. It also requires every marijuana cultivation facility to pay a $50 per ounce excise tax on marijuana sold or transferred to a retail marijuana store or marijuana product manufacturing facility.

In addition, marijuana businesses are now subject to corporate income tax and licensing fees. Though the state has not issued a revenue estimate, the Marijuana Policy Group prepared a report that calculates sales generating approximately $7 million in additional revenue during the first year, rising to more than $23 million by 2020.

The Alaska Dispatch News provided a breakdown of the implementation costs, predicted to be between $3.7 million and $7 million, as follows:

  • Department of Revenue:
    First year: $650,000-$800,000
    Second year: $300,000
    Costs pertain to three new tax-related jobs (auditor, technician, and investigator) and a one-time expense for system configuration of the new excise tax.
  • Department of Commerce, Community and Economic Development:
    First year: $1.6 million
    Second year: $1.4 million
    Costs pertain to the creation of a task force (like the one in Colorado), several new jobs, equipment, office supplies and contract expenses for various studies.

  • Department of Health and Social Services:
    First year: Up to $3 million
    Second year: not provided
    Costs pertain to treatment services, prevention, education and early intervention programs.

  • Department of Public Safety:
    First year: $1.4 million
    Second year $1.2 million
    Costs pertain to the addition of three new drug enforcement unit trooper investigators, as well as other activities related to toxicology screening, media campaigns addressing the dangers of driving under the influence, and the like.

  • Department of Environmental Conservation:
    First year: Up to $136,900
    Second year: not provided
    Costs pertain to the addition of a new position, an environmental health officer.

  • Office of the Lieutenant Governor:
    First year: $9,000
    Second year: not provided
    Costs pertain to travel to public hearings.

  • Division of Elections:
    First year: $71,257
    Second year: not provided
    Costs pertain to personnel and printing, and have already been incurred in association with the certification of the initiative.

Oregon

The Recap declared that voters approved of Oregon’s Measure 91 by 54 percent. Measure 91, which takes effect July 2015, legalizes the possession, manufacture, and sale of marijuana by and to adults, subject to state licensing, regulation, and taxation. It also imposes excise taxes as follows:

  • $35 per ounce on all marijuana flowers;
  • $10 per ounce on all marijuana leaves;
  • $5 per immature marijuana plant.

The Recap also revealed that the Oregon Liquor Control Commission will have regulatory authority over the state’s retail marijuana industry. The Commission will have until January 1, 2016 to craft the rules and regulations for recreational marijuana, and until January 4, 2016 to begin accepting applications for marijuana businesses. Retail stores are expected to open sometime in 2016.

District of Columbia

DrugPolicy.org confirmed that District of Columbia residents voted 70 percent in favor of Initiative 71, the measure that legalizes the possession of up to two ounces of marijuana for adults over the age of 21. Initiative 71 also allows individuals to grow up to six marijuana plants in their homes.

Observing that Washington, D.C. laws prevented the language of Initiative 71 from addressing the taxation and sale of marijuana, theDrugPolicy.org noted that the D.C. Council is currently considering a bill that would tax, regulate, and strictly control the sale of marijuana to adults.

Further, to take effect, Initiative 71 must be transmitted to the Congress through the D.C. Council, where it will face 30 days of congressional oversight. If Congress does not take action on Initiative 71, it becomes law.

Federal Court upholds bans on same-sex marriage

On November 6, 2014, the Sixth Circuit Court of Appeals filed a decision upholding bans on same-sex marriages in Ohio, Kentucky, Tennessee, and Michigan. The Sixth Circuit is the only federal appeals court to uphold these kinds of bans. Last month, the Supreme Court of the United States let stand three appellate court rulings that struck down laws prohibiting same-sex marriage.

This surprised many, including those in the know. In a recent Alert, we referred to a speech that United States Supreme Court Justice Ruth Bader Ginsberg gave in September at the University of Minnesota Law School. The Justice foreshadowed the Court’s hands-off approach when she indicated that there would be no need to rush to address the bans on same-sex marriage if the lower courts all ruled in the same way. In light of the Sixth Circuit’s decision, the Supreme Court will almost certainly need to step in.

The Sixth Circuit decision

Author Circuit Judge Jeffrey S. Sutton declares at the outset that “the question is not whether American law will allow gay couples to marry; it is when and how that will happen.”

Ultimately, Judge Sutton justified upholding the same-sex marriage bans on the grounds that it is the people that should resolve these kinds of questions, not the courts. Wrote he, “[w]hen the courts do not let the people resolve new social issues like this one, they perpetuate the idea that the heroes in these change events are judges and lawyers. Better in this instance, we think, to allow change through the customary political processes, in which the people, gay and straight alike, become the heroes of their own stories by meeting each other not as adversaries in a court system but as fellow citizens seeking to resolve a new social issue in a fair-minded way.”

Tax Implications

Taxpayers in Ohio, Kentucky, Tennessee, and Michigan will not see any changes in the way they file their taxes. According to a special report by the Tax Foundation, this means the following:

  • In Ohio, which bans same-sex marriage, civil unions and domestic partnerships, a Department of Taxation information release advised that married same-sex taxpayers will start with federal adjusted gross income and apply state rates and brackets. The state will continue to instruct these taxpayers to allocate income to two single returns using a state-provided schedule.
  • Likewise in Kentucky, which also bans same-sex marriage, civil unions and domestic partnerships, a Tax Alert provided guidance for same-sex taxpayers married in a state that recognizes the union. They will start with federal adjusted gross income and apply state rates and brackets. They also must complete pro-forma federal single returns and use that information for their state returns.
  • In Tennessee, which has a constitutional ban on same-sex marriage, there already is no income tax beyond that on interest and dividends, which is calculated using a state method. As a result, no additional guidance is required, because the return is not linked to the federal tax code.
  • In Michigan, as in Ohio and Kentucky, there is an existing ban on same-sex marriage, civil unions and domestic partnerships. A Notice to Taxpayers directed that married same-sex taxpayers will start with federal adjusted gross income and apply one state tax rate. These taxpayers must complete pro-forma federal single returns and use that information for their state returns.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall
216.348.5812
dkall@mcdonaldhopkins.com

Susan Millradt McGlone
216.430.2022
smcglone@mcdonaldhopkins.com

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.

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