State leaders are confronting shrinking fiscal room as inflation, higher costs, and policy shifts reduce revenues and push new tax debates onto legislatures and ballots.
Several states are considering tax changes—both progressive revenue increases and regressive cuts—as revenues tighten under inflationary pressure.
Proposals include new taxes in D.C., possible gas tax freezes in Massachusetts and Ohio, and litigation over digital ad taxes in Illinois and Maryland.
Nebraska’s revenue forecasting board saw partisan replacements ahead of a likely shortfall estimate, highlighting politicization risks in fiscal planning.
# What's happening States across the country are confronting a harsher fiscal outlook. Inflation and other economic headwinds are eroding budgets while new policy proposals and legal fights are reshaping revenue prospects. Lawmakers, governors, and ballot campaigns are responding with a mix of tax increases, tax cuts, and other revenue maneuvers.
# Concrete state developments Columbia is actively considering a package of revenue changes to cover rising costs for education, health care, and other city services. The policy options on the table include progressive measures—such as a pied-à-terre tax on very high-value homes, a net investment income tax for high-earners, and a higher income tax bracket—as well as more regressive choices like a one percentage point sales tax increase and modest property tax rate bumps.
Massachusetts and Ohio have both seen proposals to freeze their gas taxes. State leaders and experts warn that freezes would cost significant revenue—Massachusetts leaders estimate roughly $120 million a year—and both states may struggle to afford those losses amid budget pressures.
Nebraska is preparing for another budget shortfall while its governor has replaced roughly one-third of the state's revenue forecasting board with political allies, including officials who have denied the existence of a shortfall. That move raises concerns about politicizing what is meant to be an independent estimate and complicates planning for the coming legislative session.
Illinois and Maryland face litigation over recently passed digital advertising taxes. Illinois' new digital ad and social media taxes are being challenged under the Internet Tax Freedom Act. Maryland is appealing a state tax court ruling that struck down its digital ad tax, a law meant to fund education reforms.
# Federal tax policy and immigrant communities United States. Given the IRS' earlier, unlawful sharing of tax data with immigration enforcement this year—which prompted resignations and court challenges—this new question is likely to chill tax filing among immigrant communities worried about enforcement consequences. That chilling effect could reduce state tax revenues and complicate administration of state-level tax credits and programs.
# What to watch next
# Bottom line Many states are navigating reduced fiscal space and polarized politics. The mix of progressive revenue proposals, regressive tax-cut campaigns, legal fights over new taxes, and federal tax administration changes creates uncertainty for state budgets and for residents who rely on state-funded services.
States across the country will consider a host of ballot measures that could reshape the fairness and adequacy of their states’ tax systems, while other states are receiving budget forecasts that could further shape upcoming policy debates.
At least nine states are putting tax policy directly in voters’ hands. Read more.
The report points to factors such as inflation, rising costs and the end of federal pandemic aid causing fiscal stress.
This fall, voters across the country will consider a host of ballot measures that could reshape the fairness and adequacy of their states’ tax systems. Here’s some of what we’re following.
With Election Day less than 2 months away, some of the most consequential state tax policy fights this fall are happening at the ballot box. ITEP is tracking major tax measures across the country that could reshape state tax systems for years to come. Voters will weigh proposals to raise taxes on the wealthiest househo
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