Top State Tax Policies You Can Expect to Deal With in 2021: Fiscal fallout from the pandemic takes hold.

• Author: Lard, Todd

When states began their 2021 fiscal year budget processes in early 2020, just about every state anticipated revenue growth consistent with what it had seen in recent years. Most states had robust rainy-day funds, and some were looking at options to lower taxes. As we fast-forward to early 2021, few states are in the same place. The fiscal fallout of the pandemic hit states hard--although not as hard as initially expected. In the spring of 2020, state revenue forecasts were dismal. Although the forecasts improved in late 2020, they are still not rosy.

Stimulus spending from the federal government helped prop up economic activity throughout 2020, which helped state budgets by stabilizing personal income tax and sales tax revenue. Stocks have performed well, and some businesses prospered during the pandemic, which also shored up many state budgets. Increased sales tax collection on remote sales after Wayfair also helped many states. These factors helped stabilize many state coffers as the pandemic lingered. For example, California projected a $54 billion shortfall in the spring of 2020, but then projected a $15 billion surplus in the fall.

Despite the revenue uptick, significant fiscal uncertainty exists as the world still reels from the impact of the pandemic. Most experts expect state shortfalls to continue. The Brookings Institution estimated in December 2020 that state shortfalls would total $350 billion from fiscal years 2020 through 2022. Much of the shortfall stems from decreased revenue, but states also face unanticipated spending in areas such as unemployment benefits, health care, remote schools, and vaccine distribution.

With this backdrop in mind, this article discusses the state tax policy implications we expect to see in 2021. If 2020 was an unusual year for state legislatures, 2021 will be as well. Many states adjourned early in 2020 without fully addressing revenue shortfalls. As they reconvene in 2021--many in mostly virtual settings--state legislatures face unprecedented uncertainty. Whether significant tax changes will address that uncertainty considerably remains to be seen. Several variables, including whether the federal government will throw the states a lifeline, will impact state tax policy in 2021 and will likely carry into 2022. Complicating matters, state legislatures must also balance the need for additional revenue against the impact new or increased taxes will have on businesses that are already struggling with the impact of the pandemic. And, of course, state legislatures have to accomplish this task while passing a balanced budget.

Despite these difficulties, it is expected that most states will consider changes to state taxes. The changes range from gimmicks to new targeted taxes.

Gimmicks Galore

States often turn to gimmicks and other measures to close short-term revenue gaps. Some measures have no impact on taxpayers, like moving earmarked revenue among funds, tapping rainy-day funds, or offering amnesties. However, many gimmicks do affect taxpayers, like acceleration of sales tax remittance to move tax collection from one fiscal year to another.

The Massachusetts governor's budget proposals in recent years have contained a "sales tax modernization" initiative that included a real-time sales tax remittance requirement. This requirement would have dramatically affected retailers and credit card...