The COVID-19 pandemic has caused state and local governments to reevaluate their overall financial health as the impacts to FY21 budgets unfold and planning for FY22 begins. Most projections show the total state and local tax revenue losses due to the pandemic to be at least $200 billion over the next two years. The budget deficits are unprecedented. Lingering health threats and continued restrictions guarantee that the state financial situation is unlikely to improve. State governments face difficult choices in the coming years. Despite the pandemic, state governments must legally balance their operating budgets. To do so, states can reduce spending, raise taxes, or enact some combination of budget cuts and revenue raising.

States will attempt to reduce spending. Hiring and pay freezes are already in effect and will continue in many states. Discretionary spending programs will be reduced. But there is little appetite for significant budget cuts particularly in education and health care. There is almost universal consensus among public finance experts that states will have to raise substantial new revenue to close the anticipated budget deficits.

All businesses should be aware that states in which they operate will likely increase taxes to some extent. Some of these tax increases will be significant and are likely to impact businesses across multiple industries. As legislatures return to address the fiscal crisis, lawmakers will consider many different revenue raising options. Most revenue raising options will involve adjustments to existing taxes. But some states will consider enacting new taxes. Whether changing current taxes at the margins or adopting wholesale reforms, all businesses will be affected. The following are some broad revenue raising proposals affecting businesses some states will consider in the coming legislative session.

Pass-through entities and personal income taxes

It is likely that many of the over 40 states imposing broad-based personal income taxes will seek to raise more revenue from those levies. Again, the most likely approach will be increasing rates. In some states, legislators will push for rate increases on high income taxpayers. States will also seek to decouple from federal law where decoupling leads to more revenue. General base broadening and limiting deductions and credits will also be considered. While changing personal income tax burdens will affect the owners of businesses, states will also consider adopting or expanding direct taxes on pass-through entities.

Sales, use and excise taxes

During economic downturns, legislatures have traditionally turned to sales taxes to raise revenue as these taxes are some of the most stable and predictable sources of revenue. Lawmakers in 45 states and District of Columbia will likely consider a number of measures to generate more sales tax revenue while trying to avoid raising overall state rates. This is particularly true in the states without a broad-based tax on personal income. The states will consider broadening the sales tax base to include more services, from digital and cloud-computing services to traditionally exempt professional services. Some states may even consider expanding the sales tax base to include business inputs. Increasing the sales tax base may also mean eliminating under-utilized, outdated or unnecessary exemptions to further shore up revenues.

Businesses should also be aware that states will almost certainly try to raise sin taxes, such as taxes on tobacco, alcohol, vaping products, sports betting and marijuana. However, sin taxes have been popular targets the last few years and may have reduced revenue-generating capability. States without sports betting or marijuana may considering legalizing both in order to impose taxes on that activity. Finally, many other excise taxes could be targeted, such as motor fuel taxes.  

Corporate income/franchise taxes

For many reasons, legislators have looked to corporations for additional tax revenue particularly during times of fiscal distress. Currently, 44 states impose a corporate income tax. Twelve states still impose franchise or capital stock taxes. To raise revenue from these taxes, legislators may consider raising rates especially in states with relative low business tax burdens. Other potential revenue raising policies include base broadening, requiring combined reporting, reducing available credits, lowering statutory economic nexus thresholds and decoupling from federal tax law. It is less likely that states without corporate or franchise taxes will attempt to adopt such taxes.

Gross receipts taxes

In the coming years, more states will consider adopting a gross receipts tax. Currently, six states levy such a tax. Given the potential for significant revenue, many more states will contemplate imposing the tax. As a new levy in most states, a gross receipts tax creates significant compliance and administrative costs. Businesses should be aware that gross receipts taxes can be imposed in several different ways. The Washington Business and Occupation Tax, the Ohio Commercial Activity Tax, and the Texas Margin Tax are very different in how they are applied. The six states with existing gross receipts taxes may also attempt to raise rates or adjust the base to increase revenue.

What should businesses be thinking about now?

Critically, businesses large and small must be aware of the likely flurry of legislation that will be introduced in the coming year. Keeping track of the issues in multiple states is a daunting task especially for companies in the middle market. When possible, companies should work with their state business associations and chambers of commerce to follow tax legislation that will likely affect their operations. Equally important, state business organizations and chambers of commerce hoping to influence legislative proposals should consult with state tax policy experts to understand the arguments for and against proposed tax changes.

At the same time, businesses should consider what tax changes are likely to be enacted. It is often clear early in the legislative process which proposals are likely to move forward. High-level analysis of likely changes at this stage could assist companies in preparing for likely changes.

As the legislative landscape becomes clearer, businesses will need to plan in earnest. Significant tax changes can affect a wide variety of business issues and decisions. Businesses will need to understand how the changes affect current operations, as well as planned mergers, acquisitions, or expansions. Forward thinking business managers will consider how significant tax changes fit into broader strategic planning.


There is little doubt that legislators will introduce an unprecedented amount of proposed tax laws in the coming year. Given the states dire fiscal conditions, many proposals to raise taxes will be enacted. Businesses ignoring the legislative process until laws are passed run risks. They will miss the opportunity to influence legislative outcomes. They will also lose precious time in planning to deal with change. But closely following the legislative process presents many opportunities. Companies can influence legislation. They can also begin planning for what might be a very different tax environment. The RSM State and Local Tax Team encourages the business community to tax the latter approach.