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Daily Tax Report: State

States Bolster Coffers With New Taxes, Avoid Income Tax Hikes

Jan. 13, 2020, 9:45 AM

States have more revenue to spend in 2020, and that’s not because they’re raising income taxes.

In fact, six states—including New York, Utah and Georgia—are slashing individual income rates, corporate income rates or both this year, according to Bloomberg Tax data. No state is raising either rate this year.

Instead, state budgets are benefiting from a healthy economy and a slew of new taxes on out-of-state online retailers, sports betting, and marijuana. States collected $276.3 billion in total taxes in the first five months of their fiscal year 2020, up $15.7 billion, or 6%, over the same period last year, data from the Urban-Brookings Tax Policy Center shows.

Twenty-eight states enacted laws last year that tax out-of-state retailers for online sales to residents, according to the same data. That has helped states collect $100.4 billion in sales taxes since August—6.8% more than the same five-month period a year earlier. The median growth rate was 5.3%.

“Updating your code and modernizing it will bring in more revenue—that’s why legislators love it,” said Richard Auxier, a research associate at the Tax Policy Center, said. “They’re able to update a tax code without having to pass a quote unquote tax hike.”

The new money stems from two Supreme Court rulings and state marijuana legislation that freed lawmakers to reap revenue from activity they couldn’t tax before.

“This year is a little unique,” said Katherine Loughead, a policy analyst at the Tax Foundation, a tax policy think tank. “These big federal decisions have forced states to update their own statutes.”

States vary in when their tax changes go into effect. Most use Jan. 1 start dates, although some start when their fiscal years begin, which for most states is July 1. .

1930s Law

A 2018 ruling in South Dakota v. Wayfair gave the green light for states to expand their bases by collecting taxes on sales by remote retailers.

Traditionally tax codes applied only to retailers with physical presence of some kind in a state, but the percentage of transactions done online instead of in person has risen significantly every year for the past decade, according to a Commerce Department November report.

“In so many ways the tax system does not keep up with the modern economy,” Auxier said. “Sales tax is a good example. These laws were written in the 1930s. They had no idea what the hell the internet was.”

After 2019’s parade of state laws, more than 40 states and the District of Columbia have started or will soon collect sales tax based on a retailer’s economic activity instead of its physical location.

Sin Taxes ‘a Little Different’

The internet also revolutionized sports gambling, which thanks to a landmark Supreme Court decision in 2018 is providing states a new revenue stream.

Sports gambling taxes have brought in $140.8 million since June 2018 across the 12 states where gambling is live so far, according to Legal Sports Report, a sports betting-centric news source in Oregon.

Eight more states including will launch sports gambling in 2019 and collect taxes—bringing the total to 20, according to LSR analyst Dustin Gouker.

“It’s a little different with things like marijuana and sports betting, because they’re being sold as taxes on other people—not everyone in your state is going to bet on sports or purchase marijuana,” Auxier of the Tax Policy Center said.

The seven states that currently tax recreational marijuana are gaining revenue from a once nonexistent industry—although results are mixed.

Those states have brought in more than $1.7 billion of combined tax revenue in 2018according to the National Cannabis Industry Association, which lobbies on behalf of the industry. In 2019 total retail sales increased by an estimated 35% and are on pace to approach $30 billion by 2023, according to the Marijuana Business Factbook, published by Marijuana Business Daily.

As many as eight more states, including New Jersey and Florida, could legalize and tax recreational marijuana in 2020 via ballot initiatives.
“I expect there to be a lot more action in state legislatures as well,” said Morgan Fox, a National Cannabis Industry Association spokesperson.

But in some places growth has been tailing off from projections.

Colorado, for instance, saw a 53% jump in marijuana tax revenue from 2015 to 2016, then only an 18% jump from 2017 to 2018, according to a report from Pew Charitable Trusts, which analyzes state economic development programs. Likewise, Washington’s collections increased 277% from 2015 to 2016, but only rose 17% from 2017 to 2018.

“Recreational marijuana taxation is rather complicated and evolving,” said Lucy Dadayan a senior research associate at the Tax Policy Center. “States are gaining more experience and experiencing a steep learning curve as they implement legalization.”

To contact the reporter on this story: Sam McQuillan in Washington at smcquillan@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Kathy Larsen at klarsen@bloombergtax.com

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