The November 3, 2020 election was significant not only for its potential federal income tax consequences, but also for its immediate and future state and local tax consequences.
Several broad state and local tax trends should be monitored. The presidential and congressional elections could affect further federal assistance to state and local governments, which could in turn shape future state and local tax legislative responses to budget shortfalls stemming from the health crisis and resulting economic downturn. Potential federal tax changes resulting from the elections could create state conformity issues, as well as impact mobile workforce and pandemic-related tax rules. Gubernatorial and state legislature changes resulting from the elections may also influence state and local tax policies and legislative initiatives.
At the individual state level, several states – most prominently California - considered important legislative proposals:
The election considered several important legislative proposals at the state and local levels in California. These measures include the California split-roll property tax legislation, the California classification of app-based drivers, a new San Francisco tax based on executive compensation, increases to the San Francisco gross receipts tax, and San Francisco real estate transfer tax rate increases. The outcome of these proposals is discussed below as an update to our previous client update, Golden State Considers Increased Taxes: California Legislative Updates, dated September 8, 2020.
Voters Decline Split-Roll Property Tax Legislation
Proposition 15, the California Schools and Local Community Funding Act of 2020, would have converted most commercial and industrial real property to a current market valuation system, rather than assessing to fair market value only upon a change of ownership. The split-roll measure did not pass, and accordingly, the current property tax valuation regime remains unchanged.
Voters Approve Defining App-based Transportation and Delivery Drivers as Independent Contractors
California voters approved Proposition 22, a ballot initiative defining app-based transportation/rideshare and delivery drivers as independent contractors. As such, transportation/rideshare and delivery drivers will not be reclassified as employees based on A.B. 5, which previously expanded the definition of an employee effective January 1, 2020. The legislation also adopted certain labor and wage policies specific to app-based drivers and companies.
San Francisco Enacts New Executive Tax
San Francisco voters enacted Proposition L, which is an additional surcharge on either the gross receipts tax or the payroll expense for administrative officer taxpayers. The surcharge only applies if the executive pay ratio of the business, which is defined as the highest paid managerial employee of the organization wherever located compared to the median compensation paid to the organization’s employees based in San Francisco, exceeds 100:1. For purposes of the executive pay ratio test, compensation includes stock compensation. The new tax becomes effective January 1, 2022.
San Francisco Payroll Tax Phase-out and Increase to Gross Receipts Tax Rates
San Francisco voters approved Proposition F to eliminate the existing 0.38% payroll tax and significantly increase the gross receipts tax rates for large taxpayers depending on industry classification. Information (Technology) companies received the largest rate increase from 0.475% to 0.879%, and real estate, financial services, professional scientific, and technical services also received steep rate increases.
San Francisco Real Estate Transfer Tax Rate Increase
San Francisco voters also approved Proposition I to dramatically increase the real estate transfer tax rates on higher value properties. For properties valued at $10 million to $25 million, rates increased from 2.75% to 5.5%, and from 3% to 6% for properties valued at $25 million or more. The increased real estate transfer tax rates are effective January 1, 2021, and are estimated to raise almost $200 million of revenue per year.
In Arizona, voters approved a 3.5% tax surcharge on individuals with income above $250,000, and joint filers with income above $500,000, bringing the new top marginal rate to 8%. The next highest rate – 4.5% - applies to income above $159,000 for individuals and $318,000 for joint filers.
Two other states that had state income taxes on the November 3 ballot —Colorado and Illinois—went the other way. Colorado reduced its flat tax rate from 4.63% to 4.55%. Illinois rejected a switch from the current (and still effective) 4.95% flat tax to a progressive rate structure which would have imposed a top marginal rate of 7.99% on income above $750,000.
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