Daily Tax Report: State

2019 Outlook: Can New Democratic Governors Deliver on Tax Promises?

Dec. 27, 2018, 2:20 PM

Incoming Democratic governors who will replace Republicans in states throughout the country in 2019 campaigned on promises of overhauling tax credits, considering new revenue sources, and changing income tax systems.

Come January, those governors have to negotiate how to fulfill those commitments. Democrats flipped seven governor seats in the 2018 midterm elections, but Republicans still dominate some of their state legislatures.

The new governors in states such as New Mexico and Illinois will benefit from Democrat-led legislatures to change tax policy. States such as Michigan and Wisconsin, though, could see gridlock between the administrations and Republican lawmakers.

Marijuana Legalization, Tax Reform Pitched

Big tax changes could be on tap for three states where Democrat-led legislatures have sparred with Republican governors on policy proposals in recent years. Incoming Democrat governors will break from their predecessors when it comes to issues like legal recreational marijuana sales and tax increases.

Maine, for instance, will likely establish a framework to tax and regulate recreational marijuana sales in 2019, three years after voters legalized the drug at the ballot box. The state Legislature overrode a veto this year by Republican Gov. Paul LePage to pass a law that regulates and taxes legal pot sale, and Democratic Gov.-elect Janet Mills has expressed support for legal sales of the substance.

New Mexico lawmakers will also reconsider legalizing and taxing recreational marijuana once Republican Gov. Susana Martinez departs, Richard Anklam, president and executive director of the New Mexico Tax Research Institute, told Bloomberg Tax. Gov.-elect Michelle Lujan Grisham (D) has indicated she’s willing to consider it, said Anklam, who’s chairing the state’s tax and revenue transition team.

Lujan Grisham will enter office as the state reaps revenue from an oil and gas boom. Some lawmakers will continue to press for state tax reforms that faltered in recent years, though the surplus is “a mixed blessing” that may make their efforts less urgent, Anklam said.

Incoming Illinois Gov. J.B. Pritzker (D) is expected to have plenty of political capital to push his election promise of a graduated income tax, which would require an amendment to the constitution. Pritzker has said he would start the process by putting the question to voters on the 2020 ballot.

The state will end four years of feuding between the governor and the Legislature with the departure of Republican Gov. Bruce Rauner. Pritzker will enter office in January with Democratic supermajorities in the House and Senate.

Legislatures Push Back

Policy overhauls, though, are less likely in Michigan and Wisconsin. Incoming Democrat governors face Republican-led legislatures that may push back on some of their campaign promises.

Michigan governor-elect Gretchen Whitmer (D) promised $3 billion annually toward infrastructure improvements in a state where potholes and the nation’s highest auto insurance rates were central in the campaign. But she will face a Legislature unmotivated to roll back changes Republicans made in tax policy over Gov. Rick Snyder’s (R) eight years in office.

“Whitmer made a lot of promises that will cost a lot of money but I have no idea how she will finance them,” Dan Papineau, director of tax policy and regulatory affairs for the Michigan Chamber of Commerce told Bloomberg Tax in an email.

Wisconsin may also face tax policy inaction in 2019. Democratic Gov.-elect Tony Evers will share power with a Republican House and Senate following the departure of Gov. Scott Walker (R), who cut $8 billion in taxes during his eight years in office.

Evers campaigned on a tax equity platform and pledged to overhaul the state’s scheme for granting tax credits and deductions to corporations. But Republicans are already signaling an unwillingness to work with the incoming governor.

The Legislature passed a series of bills Dec. 5 designed to wrest political control from the executive branch. Evers called the changes a rushed attempt to “override the will of the people of Wisconsin who asked for change.”

Wait-and-See Approach

New Democratic governors in two other states have been less clear about how they will raise revenue for growing state needs.

In Nevada, Gov.-elect Steve Sisolak vowed to put more money toward education but steered away from specific proposals of where to get the money.

Opponents criticized Sisolak during his campaign for suggesting he could increase property taxes following a similar push by the Legislature. A strong Democrat majority in the Legislature, though, gives Sisolak more freedom to act on the issue, Michael Pelham, director of government and community affairs for the Nevada Taxpayers Association, told Bloomberg Tax.

“I think he’s going to be able to kind of do what he wants,” he said.

Sisolak may join Kansas Gov.-elect Laura Kelly (D) and take a slower approach to tax policy. Kelly says she wants to the state to expand Medicaid and increase funding for K-12 education and transportation but will wait for mid-2019 revenue numbers before setting a new course for tax policy.

Kelly said she’s hesitating due to state tax and budget turmoil following a package of tax cuts in 2012. The Legislature repealed those tax cuts in 2017, and the impacts are still unfolding.

—With assistance from Michael J. Bologna in Chicago; Christopher Brown in St. Louis; Alex Ebert in Columbus, Ohio; and Aaron Nicodemus in Boston

To contact the reporter on this story: Brenna Goth in Phoenix at bgoth@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Megan Pannone at mpannone@bloombergtax.com

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