Weekly Round-Up: Election Results Set the Stage for Structural Change in Many States [Free Access BNA Premium Content included with Blog Post]

Following the 2012 elections, a single party, either Democrat or Republican, fully controls both the executive and legislative branches of 35 state governments—23 are controlled by Republicans and 12 by Democrats, according to a new article published in this week’s issue of the Weekly State Tax Report.

As a result, real reform will at least be considered. The ideas will differ in the Democrat-controlled states versus the Republican-controlled states, but for business taxpayers, that can lead to a lot of discussion of significant changes to the tax system. According toJoseph Crosby, senior vice president and principal of MultiState Associates, even if those changes prove positive in the long run, overall they could have significant negative impact on specific types of businesses or specific industries.

In 2010, the elections were a tidal wave of Republican control. In some of those states, for example, in Kansas, there were massive changes to the tax system overall, including business taxes. When looking at the results of the 2012 elections and the states involved, Crosby predicted there should be significant activity in North Carolina, which is now in full Republican control, and significant activity in Ohio from the Republican side.

On the Democratic side, in states like California where the Democrats now have a supermajority in both legislative chambers, tax increases can be passed without Republican votes. California's nonconformity with the Internal Revenue Code could pose a simple example. Currently, California conforms with the federal code effective Jan. 1, 2005, because legislation trying to bring that conformity up to date just has not been valid under California's current two-thirds voting requirement, said Steve Wlodychak, a principal with Ernst & Young LLP in Washington, D.C.

Since 1978, California's Proposition 13 has required that increases in state taxes be adopted by not less than two-thirds of the members elected to each house of the Legislature. Proposition 26, enacted in 2010, changed the two-thirds legislative vote for taxes to include “any change in state statute which results in any taxpayer paying a higher tax.”

Whether the state's new supermajority heralds a challenge to these ballot measures or simply makes their implementation less onerous remains to be seen. But Wlodychak noted that supermajorities are ephemeral. “They don't last very long,” he said.

Minnesota also has full Democratic control now, and those Democrats have been talking for years about changes that they would like to make to certain provisions that affect foreign operating companies. For their part, fully Democratic Massachusetts and Connecticut may look at tax incentive reforms.

For an in-depth look at the impact of this development on states, check out the article by Bloomberg BNA Corespondents Tripp Baltz, Christopher Brown, William H. Carlile, Laura Mahoney, and Yereth Rosen [which can be read in its entirety here].

In other developments…

Proposed New York budget amends related party royalty addback , proposes other changes, according to a new PwC alert.

Virginia Update: Final guidelines on single sales factor election for manufacturers and phase-in of single sales factor apportionment for retailers , according to a new alert by Deloitte.

The sources of state and local tax revenues , by the Tax Foundation.

Governors' 2013 State of the State addresses , by Governing magazine.

North Carolina Tax Reform Options: A Guide to Fair, Simple, Pro-Growth Reform , a new report.

2013 Tax Legislative Outlook , by PwC.

Weekly Map: Sources of State and Local Tax Revenue: Property Tax , by the Tax Foundation.

The Tax Foundation reviews a new report by the Congressional Research Service on how tax rates do matter for profit sharing .

New Report: Cell Phone Taxes Exceed 20% in Several States , a new report by the Tax Foundation.

Compiled by Priya D. Nair
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