What do the 2020 elections mean for tax policy?

What do the 2020 elections mean for tax policy?

Politics and policy are not always moving in the same direction, and tax policy was one area where many voters appear to have sent in a split ticket on the federal and state level in the 2020 election.

On the federal side, a likely Biden victory means a new administration will hold the veto pen as Congress decides which parts of the Trump individual income tax cuts should be made permanent or allowed to expire in 2025.

Biden favors returning to the top federal marginal personal income tax rate that was in use when he was Vice President, while retaining the rate reductions for most other taxpayers. Though the Tax Cuts and Jobs Act made a permanent corporate tax rate reduction, Biden supports paring that cut back halfway, raising the federal corporate rate to 28%.

But with voters likely electing a very closely divided Congress, both sides will have to decide if they feel comfortable sending any tax changes to the President’s desk before the 2022 midterms, or if they’ll do the very Washington thing and wait until late 2024 when the next Presidential election will be upon us.

On the state level, ballot initiatives to raise and lower taxes had some surprising results that defy partisan expectations. Voters in Illinois rejected a proposal to end the state’s constitutional requirement for levying a flat income tax, and replacing it with a graduated tax rate structure like Nebraska’s.

Supporters argued their “Fair Tax” proposal would only impact the highest-earning taxpayers, but given Illinois’ general disposition for high taxes, not enough voters believed that, and the measure was defeated by about ten points.

Colorado is becoming a more consistently blue state in presidential elections, but like Illinois, it also levies a single rate income tax that is lower than Nebraska’s. In Colorado’s case, the tax applies to both personal and corporate income.

Although most Coloradans gave their votes to Joe Biden, they also approved a ballot measure that would give them a bit more of their paychecks back, cutting state income tax rates slightly to 4.55%. That rate is about 30-40% lower than the top income tax rates paid by Nebraska’s individuals and businesses.

In the next state over, we are currently watching the final vote tally in traditionally red, low-tax Arizona, where some realignment of both politics and policy in the state may be underway.

Voters there narrowly approved a proposition to increase their personal income tax rate on the state’s highest earning individuals and businesses from 4.5% (about the same as neighboring Colorado), to 8%, which is higher than the top income tax rates in Nebraska.

The funding from this tax increase is earmarked for education. This is a loss for taxpayer groups in Arizona, clearly, which has long been known as a destination state. Plenty of former Nebraskans have parked their residences and incomes in Arizona in part due to its favorable tax treatment.

But as Arizona’s population has grown tremendously, a consistent debate over the adequacy of education funding in the state has led to a multi-year political ping pong match over how the school system should be funded.

Arizona has low property taxes, and voters and politicians had past opportunities to tap more into sales taxes to fund schools. However, in 2018, voters adopted an industry-supported ballot measure to prohibit the state from expanding its sales tax base to new services, cutting off one pathway that might have made it possible to increase education funding without raising tax rates.

All of these outcomes can provide insights for Nebraska policymakers as our own state looks to future tax and education funding reforms. Progressives can give their approval to tax reforms given the right circumstances, and conservatives can lose important tax battles if they are inflexible and too closely married to the status quo.

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