With the passing of the June solstice, summer officially began and most state legislative sessions came to a conclusion. Many states are starting to put new policies into effect now that were passed during this year's legislative session (or are being phased in gradually).
To ensure uniformity throughout the tax year, the majority of state changes to individual and corporate income tax laws go into effect on January 1 of each year. With the exception of Alabama, Michigan, New York, and Texas, all states' fiscal years begin on July 1, which is also the date that many sales and excise tax adjustments go into effect.
At least 32 significant tax policy changes will go into effect in 18 states on July 1, 2023, including lower sales tax rates in South Dakota and New Mexico, the repeal of the corporate franchise tax in Oklahoma, the implementation of a payroll tax in Washington, and the imposition of taxes on recently legalized cannabis product sales in Maryland and Minnesota.
Separately, across 11 states, at least 22 significant tax policy changes have been passed this year or implemented gradually and will take effect retrospectively on January 1, 2023, including lower income tax rates in West Virginia, Arkansas, Michigan, North Dakota, and Utah. Additionally, a few states saw significant changes to their tax laws go into effect after January 1, 2023, but before July 1.
Below, you may find a summary of these tax law modifications. This isn't a complete list because it leaves out adjustments to some deductions, exclusions, definitions, administrative processes, calculations, or regulations that have only a minimal impact on a tiny percentage of taxpayers or are relatively minor in nature. This study instead focuses on significant structural changes, such as rate adjustments, the introduction of new taxes, and significant adjustments to the tax bases of significant statewide taxes.
Income Tax Changes
Indiana
Senate Bill 417, which was enacted in May and takes effect July 1, allows Indiana counties to adopt local income taxes to pay for county staff expenses related to the state’s judicial system. Notably, any such tax rate must be levied in increments of one-hundredth of one percent (0.01 percent), not exceeding two-tenths of one percent (0.20 percent), and it may be in effect for no more than 25 years.
Payroll Tax Changes
Washington
In Washington, a 0.58 percent payroll tax to fund a mandatory long-term care insurance program will take effect July 1, 2023, following litigation that resulted in various legislative changes and delays. The tax and the underlying program are the results of a law that was initially enacted in 2019.
Sales and Use Tax Changes
Illinois
Illinois’ one-year sales tax exemption for groceries, which was enacted in 2022 as part of the Family Relief Plan, is set to expire at the end of the second quarter, with no extension in place. Starting July 1, Illinois will again collect a sales tax on groceries at a preferential rate of 1 percent, well below the statewide general sales tax rate of 6.25 percent.
Indiana
Starting July 1, Indiana will significantly expand its sales tax exemption for nonprofit organizations selling tangible personal property. Under current law, nonprofit organizations are not required to collect sales taxes if they make $20,000 or less in sales in a year. Under S.B. 417, enacted in May 2023, nonprofit organizations making $100,000 or less in sales will not be required to collect sales taxes on otherwise taxable sales.
New Mexico
On July 1, New Mexico will phase in another reduction to its sales tax, known in New Mexico as the gross receipts tax (GRT), bringing the rate from 5 to 4.875 percent. This change is the result of a law enacted in 2022 to reduce the rate from 5.125 to 4.875 percent over two years. A provision to reduce the rate even further—to 4.5 percent this July and 4.375 percent next July—was included in an omnibus tax bill that was sent to the governor, but that proposed rate reduction was among the provisions receiving line-item vetoes. She did, however, approve an expansion of the GRT deduction for medical services, which takes effect July 1.
South Dakota
House Bill 1137, enacted in March, reduces South Dakota’s statewide sales tax rate from 4.5 to 4.2 percent. This rate reduction is effective for four years beginning July 1, 2023, and expiring after June 30, 2027.
Separately, Senate Bill 30, enacted in February, amends South Dakota’s sales tax economic nexus statute for remote sellers, removing the 200 transactions threshold, a noteworthy simplification of the design of the 2016-enacted law that the U.S. Supreme Court evaluated in its 2018 South Dakota v. Wayfair decision. Effective July 1, only remote sellers with more than $100,000 in gross sales in South Dakota will be required to register with the state and collect and remit South Dakota’s sales taxes. In the months immediately following the Wayfair decision, many states initially modeled their economic nexus laws after South Dakota’s. More recently, however, many states have removed their transaction thresholds in an effort to simplify their laws and reduce compliance burdens for those remote sellers with many transactions but a relatively small total amount of gross sales in their state.
Property Tax Changes
Indiana
Effective July 1, 2023, under S.B. 46, enacted in May, Indiana counties may provide a county option circuit breaker tax credit against qualifying individuals’ property tax liability.
Capital Stock Tax Changes
Oklahoma
Oklahoma was among the states enacting structurally sound business tax reforms this year with the adoption of H.B. 1039 in May. This new law repeals the state’s corporate franchise (capital stock) tax, effective July 1, 2023. Currently, the tax is levied at a rate of 0.125 percent, with a maximum payment of $20,000.
Tobacco, Vapor, and Cannabis Tax Changes
California
On July 1, California will adjust the tax rate imposed on the wholesale cost of other tobacco products (OTP), including vapor products, changing it from 61.74 to 56.32 percent of the wholesale cost. Each year, California’s Department of Tax and Fee Administration is required to adjust the rate on OTP to bring it into parity with the effective rate on cigarettes. Since 2017, California’s cigarette tax rate has been $2.87 per pack of 20. An increase in the average retail price of cigarettes has thus caused the effective rate of the $2.87 per pack cigarette tax to decline, triggering the automatic reduction in taxes on OTP.
Idaho
On July 1, Idaho will implement a new tax cap of $0.50 per cigar as a result of H0330, enacted in April. Currently, cigars are taxed at a combined 40 percent of the wholesale sales price, with two separate taxes of 35 percent and 5 percent imposed. Moving forward, the cap will limit the taxes that would otherwise be collected on cigars that have a wholesale sales price exceeding roughly $1.25 per cigar.
Indiana
Among the tax changes included in Indiana’s biennial budget enacted in May is a provision increasing the stamp discount for cigarette distributors from $0.013 to $0.02 per cigarette, which will reduce cigarette tax revenue slightly. Another provision increases the percentage of cigarette and tobacco tax revenue dedicated to the general fund.
Louisiana
House Bill 635, signed into law in June, will triple Louisiana’s excise taxes on vapor products, with the tax increasing from 5 to 15 cents per milliliter on July 1.
Maryland
With the passage of H.B. 556 in May 2023, Maryland has joined 22 other states in enacting legislation to legalize the recreational use of marijuana. When legal retail sales begin on July 1, an excise tax will be levied on the retail price at a rate of 9 percent.
Minnesota
Minnesota is among the states to have legalized recreational marijuana this year, with H.F. 100 enacted in May. Beginning July 1, sellers of cannabis products will be required to register with the state and begin collecting the new cannabis tax, which will be levied at a rate of 10 percent on the retail sales price.
Tennessee
As a result of SB 0378, enacted in May, the state of Tennessee will implement a new 6 percent tax on retail sales of hemp-derived cannabinoids, including THC and CBD. The tax will be levied in addition to the 7 percent statewide general sales tax rate and any applicable local option sales taxes.
Sports Betting Tax Changes
Tennessee
Effective July 1, Tennessee will impose a new privilege tax on sportsbook operators of 1.85 percent of the total amount of gross wagers. This change is the result of SB 0475, which was enacted in May. Sports betting became legal in 2019 when the state passed the Sports Gaming Act.
Transportation Tax Changes
California
The California Department of Tax and Fee Administration issued Special Notice L-901, which established that as of July 1, the Oil Spill Prevention and Administration (OSPA) fee, which is levied on owners of crude oil, petroleum products, and renewable fuels, will increase from $0.085 to $0.091 per barrel. The Department of Tax and Fee Administration has also announced that starting July 1, 2023, the OSPA fee will increase annually at the rate of inflation according to the California Consumer Price Index.
Colorado
As a result of SB21-260, enacted in 2021, Colorado is phasing in a “road usage fee” on gasoline and diesel fuel. On July 1, the fee on gasoline is set to increase from $0.02 to $0.03 per gallon, and the fee on diesel will increase from $0.04 to $0.06 per gallon. Similarly, the “bridge and tunnel impact fee” paid by special fuel distributors will increase from $0.02 to $0.03 per gallon. These so-called fees are levied in addition to the gasoline excise tax of $0.22 per gallon.
Illinois
An inflation adjustment to Illinois’ motor fuel tax will take effect July 1, 2023, through December 31, 2023. Gasoline will be taxed at a rate of $0.454 per gallon, up from $0.423 per gallon, while diesel will be taxed at a rate of $0.529 per gallon, up from $0.498 per gallon.
Indiana
Indiana has published inflation-adjusted fuel tax rates for the fiscal year that begins July 1. The gas tax will increase from $0.33 to $0.34 per gallon, and the special fuel license tax will increase from $0.55 to $0.57 per gallon. Additionally, the biennial budget, enacted in May, diverts gasoline use tax revenue from the general fund to the state highway fund.
Kentucky
On July 1, Kentucky’s tax on gasoline will increase from $0.266 to $0.287 per gallon, petroleum from $0.266 to $0.287 per gallon, and special fuels from $0.236 to $0.257 per gallon, in accordance with changes in the average wholesale price (AWP) of gas. Kentucky’s excise tax is levied at a rate of 9 percent of the AWP before an additional surcharge is imposed. Notably, Kentucky law limits the extent to which the AWP can increase or decrease to 10 percent in either direction in a given year for gas tax calculation purposes.
Maryland
Maryland’s fuel taxes will increase on July 1, 2023. The state’s gas tax will rise to $0.47 per gallon, and the diesel tax will climb to $0.4775 per gallon. In accordance with a 2013 law, Maryland directs the state’s comptroller to determine the average fuel price and set the tax rates based on that price. Generally, the average price is based on data compiled by the Oil Price Information Service and on prices for regular unleaded motor fuel reported during the 12-month period ending on the last day of the second immediately preceding month. The fuel tax rate is currently 3 percent of that determined average fuel price.
Missouri
On July 1, Missouri’s gas tax will increase from $0.22 to $0.245 per gallon, following a schedule of increases implemented by legislation enacted in 2021 that set out to raise the tax by $0.125 per gallon by July 1, 2025.
Montana
Effective July 1, 2023, H.B. 55, which was enacted in May, creates a tax of $0.03 per kilowatt hour or its equivalent on electric current from public electric vehicle charging stations. Public charging stations already in operation have until July 1, 2025, to install meters to collect the tax. To relieve the tax burden on in-state electric vehicle owners, H.B. 55 reduces electric vehicle registration fees by 30 percent starting in 2028.
Utah
House Bill 301, enacted in March, reduces Utah’s gas tax rate from $0.364 to $0.345 per gallon while imposing a new tax at a rate of 12.5 percent on retail sales of electric current from electric vehicle charging stations.
Virginia
Virginia’s fuel taxes will increase on July 1, including the gas tax, which will increase from $0.28 to $0.298 per gallon, and the diesel tax, which will increase from $0.289 to $0.308 per gallon, as well as taxes on blended fuels.
Miscellaneous Tax Changes
Colorado
As part of the road usage fee legislation going into effect July 1, Colorado will also implement a $0.27 “fee” on deliveries and a $0.30 fee on rideshares.
New Mexico
Among the tax changes the governor approved in New Mexico’s omnibus tax bill is an expansion of the state’s film tax credit, which will take effect July 1.
Notable State Tax Changes with Retroactive Effective Dates of January 1, 2023
Below are notable state tax policy changes that were enacted during states’ 2023 legislative sessions and implemented retroactively with effective dates of January 1, 2023.
Arkansas
Building upon a series of reforms adopted in recent years, S.B. 549 was enacted on April 10, reducing individual and corporate income tax rates, retroactive to January 1, 2023. In 2022, Arkansas’s top marginal individual income tax rate was reduced from 5.5 to 4.9 percent, retroactive to January 1, 2022, and the top marginal corporate income tax rate was reduced from 5.9 to 5.3 percent, effective January 1, 2023. The cuts enacted this year will reduce these rates even further, bringing the top marginal individual income tax rate to 4.7 percent and the top marginal corporate rate to 5.1 percent, effective for tax year 2023 and on.
Indiana
In May, Indiana Gov. Eric Holcomb (R) signed into law H.B. 1001, the state’s biennial budget bill for fiscal years 2024 and 2025. The most notable tax change included in the budget is a provision to accelerate previously enacted individual income tax rate reductions, starting with tax year 2024. Additionally, effective retroactively to January 1, 2023, the dependent exemption is doubled in the first year in which such exemption is allowed, such as for infants and newly adopted children, and the Earned Income Tax Credit (EITC) is recoupled with the federal credit.
Kentucky
H.B. 360, enacted in March 2023, made several changes to Kentucky’s sales tax base, and many of these provisions are effective retroactively to January 1, 2023.
Michigan
Michigan’s flat individual income tax rate has been reduced from 4.25 to 4.05 percent for 2023, the automatic result of a 2015 law that prescribed tax rate reductions for any year, beginning in 2023, in which general fund revenue growth exceeds the rate of inflation growth. In March 2023, Attorney General Dana Nessel issued a legal opinion stipulating that the rate will revert back to 4.25 percent for 2024 and beyond. This opinion has sparked debate among legislators and stakeholders as to the intent and letter of the 2025 law, which could lead to litigation.
Minnesota
On May 21, 2023, Minnesota’s Gov. Tim Walz (DFL) signed into law an extensive omnibus bill that includes many tax increases on businesses and many narrowly targeted tax reductions for certain individuals. Effective for tax year 2023, the law expands Minnesota’s taxation of global intangible low-taxed income (GILTI) to 50 percent, further limits the net operating loss (NOL) deduction, increases numerous tax credits, and expands the income tax exemption for Social Security benefits, among other changes.
Mississippi
This legislative session, Mississippi lawmakers built upon recently enacted rate reductions by adopting important structural changes. House Bill 1733, enacted on March 27, substantially improves the income tax treatment of business investments in machinery and equipment by allowing permanent full expensing of these investments in the year such expenses are incurred. Separately, H.B. 1733 codifies Mississippi’s practice of allowing first-year expensing, up to certain limits, for § 179 property. Previously, Mississippi’s administrative code contained a § 179 expensing provision, but this law will ensure those protections are solidified in the underlying statute. These changes are retroactive to January 1, 2023.
Nebraska
In May, LB754 and LB243 were enacted in Nebraska, making numerous tax changes with various effective dates. For tax year 2023, LB243 increases the state credit for community college property taxes paid to $100 million. Starting in 2024, the credit will offset 100 percent of community college property taxes paid.
New Mexico
The legislature in New Mexico passed H.B. 547, an omnibus tax bill, and on April 7, Gov. Michelle Lujan Grisham (D) allowed some provisions to become law but vetoed others. Among the tax changes signed into law is an increase to the Child Tax Credit effective retroactively to January 1, 2023.
North Dakota
After legislators considered several different proposals to reduce individual income tax rates, on April 28, Gov. Doug Burgum (R) signed into law H.B. 1158, a bill that contains several tax changes, the most notable of which is a reduction in North Dakota’s individual income tax rates. Specifically, H.B. 1158 converts the existing five-bracket individual income tax structure with a top rate of 2.9 percent into a more consolidated rate schedule with a top rate of 2.5 percent, a lower intermediate rate of 1.95 percent, and a sizeable zero bracket. These changes are retroactive to January 1, 2023.
Tennessee
On May 11, Tennessee’s Gov. Bill Lee (R) signed H.B. 323, a bill that includes several structural tax improvements. Specifically, effective January 1, 2023, the law conforms Tennessee to IRC § 168(k), which offers bonus depreciation for firms making qualified machinery and equipment investments. From 2018 to 2022, the provision allowed 100 percent bonus depreciation, known as full expensing, but as of this year, the provision is phasing down by 20 percent per year until it sunsets in 2027.
For purposes of the excise (corporate income) tax and the franchise (capital stock) tax, the new law shifts to single sales factor apportionment, moving away from a three-factor formula with a triple-weighted sales factor. The transition to single sales factor will be fully effective in 2025, but tax year 2023 is the first year of the three-year phase-in.
The law also reduces reliance on the statewide gross receipts tax, known as the business tax, by increasing the exemption threshold to $100,000, effective starting with tax year 2023.
Utah
In March, H.B. 54 was enacted, making several changes across various parts of Utah’s tax code. Several of the tax changes included in the law (such as the proposed state sales tax exemption for groceries) would take effect in January 2025 but are contingent upon the outcome of a legislatively referred constitutional amendment set for the November 2024 ballot. Among the provisions that are retroactive to January 1, 2023, however, are a reduction in Utah’s individual and corporate income tax rates from 5.85 to 4.65 percent, an additional dependent exemption for taxpayers in the year of that dependent’s birth, a provision that expands eligibility for the Social Security income tax credit, and an EITC increase.
West Virginia
West Virginia joined a growing number of states in reducing its individual income tax rates with the enactment of H.B. 2526 in March. These changes, which include a reduction in the top marginal rate from 6.5 to 5.12 percent and an across-the-board reduction in the lower rates,
are retroactively effective as of January 1, 2023, and occur alongside other substantial tax reforms made by the state.
Notable State Tax Changes with Other Effective Dates
Occasionally, tax policies take effect upon enactment, or on dates other than January or July 1. In addition to the legislation taking effect July 1, or which took effect January 1 or retroactive to January 1, two pieces of tax legislation that took effect in April are worth noting.
Delaware
House Bill 2, enacted in April 2023, legalized recreational marijuana in Delaware as of April 23, 2023. However, legal sales will not begin until late 2024 or 2025. When legal sales begin, a 15 percent excise tax will be levied on the retail price of cannabis products.
New Mexico
Another tax change included in H.B. 547, New Mexico’s omnibus tax bill, is a one-time income tax rebate of $500 for single filers and $1,000 for married couples filing jointly. This provision took effect April 1, 2023.
