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February 10, 2022

Governors' budget proposals include tax relief measures and other tax changes

With 2022 underway, governors across the country have delivered their state-of-the-state addresses and presented proposed budgets for the upcoming fiscal year (collectively, "proposals"). As in prior years, many of these proposals include state tax law changes. With states reporting revenues beyond prior estimates due both to surprisingly robust tax receipts and federal funding in response to the COVID-19 pandemic, the proposals' overarching theme thus far appears to be providing tax relief to both individuals and businesses. This relief includes cutting income tax rates, eliminating certain taxes and providing one-time rebates to taxpayers, as well as targeted tax credits and incentives to support business development. Among these proposals, New Jersey's governor promised not to raise taxes, while the governors of California and Massachusetts each recommended tax relief that will be of keen interest to businesses.

Tax relief trends among the states

Income tax relief

Several governors proposed cutting income tax rates. Idaho proposed and enacted (2022 ID HB 436) reductions in its income tax rates on February 4, 2022, reducing its highest income tax rate for corporations and individuals to 6% from 6.5%. The change is retroactively effective January 1, 2022.

Reductions in both individual and corporate income tax rates have also been proposed by governors in Iowa (changing to a flat 4% individual income tax and "buying down" the top corporate rate until it reaches 5.5%) and Nebraska (lowering the top rate for both to 5.84% from 6.84% over five years). In Pennsylvania, the governor proposed phasing down the current 9.99% corporate income tax rate to ultimately reach 4.99%,1 while Rhode Island's governor proposed reducing the corporate minimum tax from $400 to $375.

Mississippi's governor proposed eliminating the state's individual income tax, while South Carolina's governor seeks to reduce the state's individual income tax rate by one percentage point over five years. Additionally, Missouri's governor said in his state-of-the-state speech that economic performance has triggered an additional decrease in the individual income tax rate this year from 5.4% to 5.3%. Meanwhile, New York's governor proposed accelerating already-pending individual income tax cuts for middle-class taxpayers in the current year.

Governors are not the only state officials proposing to cut income tax rates. Legislators in Colorado, Indiana, Michigan, Missouri, New Hampshire, New Jersey, Utah and Virginia have already introduced legislation to reduce their states' income tax rates. The legislative proposal introduced in Indiana would pay for an income tax rate reduction by expanding the state's sales tax base to include more services, while the proposal to eliminate the Mississippi personal income tax would make up for the lost revenues by increasing the state's sales and use tax rate.

One-time income tax rebates for individuals have been proposed by the governors of Georgia, Hawaii, Idaho, Indiana, Kansas, Minnesota, New York and Virginia. Idaho enacted a rebate for individuals on February 4, 2022, equal to the greater of 12% of the tax reported on the taxpayer's 2020 Idaho Form 40 or $75 per taxpayer and each dependent (2022 ID HB 436).

COVID-19-related relief

Governors are also looking at providing relief to individuals and businesses affected by the continuing economic impact of the COVID-19 pandemic. For example, California's governor and legislative leaders agreed to conform California's income tax treatment of payments from the federal Restaurant Revitalization Fund and grants from the Shuttered Venue Operators Grant program to their respective federal income tax treatment and provide additional funding for existing grant programs. These changes are in SB 113, which was enacted on February 9, 2022 (see Tax Alert 2022-0235). New York's governor proposed a $1 billion property tax rebate program that would help individuals with rising costs caused by the ongoing pandemic.

Several governors, including those in Iowa, Maryland, Michigan, Rhode Island, South Carolina, Vermont and Virginia, proposed eliminating the state income taxation of certain retirement income, primarily focused on relief for military income.

Relief from sales taxes and gross receipts taxes

Regarding other state and local taxes, the governors of Kansas, Oklahoma and Virginia proposed eliminating the sales and use tax on groceries, while the Illinois governor proposed suspending the sales and use tax on groceries for one year. Utah's governor also recommended providing relief from the state's sales tax for grocery purchases but would do so through a tax credit.

New Mexico's governor called for reducing the rate of the state's gross receipts tax, which operates similarly to other states' sales taxes, by 0.25 of a percentage point (from 5.125% to 4.875%). Separately, lawmakers in Illinois, Iowa, Massachusetts and Tennessee have introduced proposals to reduce sales tax rates in their states. The proposal in Iowa would only reduce sales tax on the purchases of American-made products.

Business tax relief

Unemployment insurance tax relief, either through the replenishment of depleted fund balances or freezing base rates, has been proposed by the governors of Colorado, Idaho, Minnesota and South Carolina.

Governors have also proposed waiving certain business-related fees. California's governor proposed waiving certain fees for all new businesses commencing in the state while Maryland's governor called for eliminating filing fees for businesses that submit their annual report online. South Dakota's governor proposed eliminating fees associated with starting or renewing a business.

Property tax relief

Meanwhile, Indiana's governor called for the elimination of the state's business personal property tax on new equipment, and Connecticut's governor proposed restoring full eligibility for the property tax credit (currently restricted to people over the age of 65 and those with dependents) to all taxpayers below certain income limits as well as increasing the credit amount from $200 to $300. The Illinois governor proposed a one-time property tax rebate for homeowners.

Gas tax relief

Lastly, some governors recommended providing relief from state gas taxes to help mitigate the costs of rising fuel prices. For example, Florida's governor proposed a five-month gas tax holiday while the governors of Illinois and Virginia proposed suspending planned gas tax increases that have already been scheduled for the upcoming year.

Targeted tax credits and incentives

Several governors have proposed introducing new, or expanding existing, tax credits and incentives for specific groups or activities. California's governor introduced a mix of both. Action has already been taken on the governor's proposal to shorten the previously enacted suspension on the use of net operating losses (NOLs) and prior limits on business tax credits, including California's research and development (R&D) credit.2 SB 113 (enacted February 9, 2022) restores NOLs and removes the limit on business tax credits for tax year 2022 (see Tax Alert 2022-0235). Yet to be considered is the governor's proposal to establish new credits for (1) qualified companies headquartered in California that invest in activities and technologies that mitigate climate change; and (2) businesses opting to develop green energy technologies (see Tax Alert 2022-0178).

Hawaii's governor proposed providing $56 million to fund a state small-business credit initiative intended to offer capital for local start-up tech companies.

The extension and renewal of existing tax credit programs have also been introduced. The Illinois governor advocated extending the state's existing Economic Development for a Growing Economy (EDGE) tax credit program, which is currently set to expire on June 30, 2022, while Maryland's governor called for expanding and extending that state's manufacturing incentive programs.

Indiana's governor has proposed modernizing that state's Economic Development Corporation toolkit by providing a new funding mechanism that would allow the state to "more competitively invest in transformational economic development opportunities," provide more flexibility to its existing economic tax credit program and offer incentives aimed at attracting remote-worker jobs in Indiana.

Various other credit proposals have been recommended by the governors of Massachusetts (clarifying which industries are eligible for the commonwealth's existing R&D credit), Minnesota (allocating $7 million to fund an "angel investor" tax credit program), New York (initiating tax credits aimed at supporting food production), Rhode Island (allocating $13.5 million for the Rebuild Rhode Island tax credit) and Vermont (expanding tax credits to encourage investment in downtown areas of the state).

Other tax proposals

In addition to the proposals mentioned previously, California proposed and enacted (SB 113, Tax Alert 2022-0235) changes to the state's elective pass-through entity (PTE) tax. The changes allow (1) the credit for PTE tax paid to reduce tax owed to below a taxpayer's tentative minimum tax; and (2) a business owned by individuals using a disregarded entity to participate in the elective PTE tax and credit.3

The Massachusetts governor has again introduced a sales tax "modernization" initiative that includes a "real-time" requirement for sales tax remittance. This requirement, if enacted, would affect both retailers and financial services companies that process Massachusetts credit card transactions, starting in 2026. The governor has also proposed updating the current conformity date of the commonwealth's personal income tax code to the Internal Revenue Code as it exists in 2022 (from the current 2005 date), reducing the personal income tax rate on short-term capital gains to 5% (from the current 12% rate), and legalizing and taxing sports betting, among other tax law changes aimed at providing tax relief to individuals in the commonwealth.

In addition to the proposed corporate rate reduction mentioned previously, Pennsylvania's governor proposed strengthening the state's intercompany add-back rules, codifying economic nexus rules and adopting market-based sourcing for sales of intangible property.

In his proposed supplemental budget, the Washington governor proposed point-of-sale tax rebates for purchases of electric vehicles in the state.

Rhode Island's governor proposed allowing cities and towns in that state to (1) exempt from local property taxes tangible personal property that is treated as a business asset; and (2) reduce the interest rate for deficiencies applicable to non-trust fund taxes from 18% to 12%.

Lastly, while not a proposed tax law change, the governors of Idaho, Illinois and Kansas each recommended using some of their surplus tax revenues to bolster their states' "rainy day" funds.


Over the next few months, state legislatures will consider these governors' budget proposals and legislative initiatives. While some will be enacted as proposed or with some modifications, many will not be adopted or may be dropped in favor of different proposals advanced by state legislatures or recommended for further study and later reintroduction. With the 2022 primary and general elections approaching, quick legislative action on state budget and tax proposals is expected over the next few months.

EY will continue to monitor these developments and provide additional updates as conditions warrant.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation
   • Scott Roberti (
   • David Sawyer (


1 The rate would be reduced to 7.99% in 2023; 6.99% in 2026; 5.99% in 2027; and 4.99% at an unspecified date.

2 Under Cal. Laws 2020, ch. 8 (2020 CA AB 85), the NOL suspension applied to California taxpayers with net business income of $1 million or more and the amount of business tax credits that could be used in a year was limited to $5 million for the tax years 2020, 2021 and 2022.

3 SB 113 makes additional changes to the PTE tax that were not part of the governor's proposal. These changes (1) amend the definition of "qualified entity" to include a partnership as an eligible partner, shareholder or member; and (2) include guaranteed payments defined by IRC Section 707(c) as qualified net income so they qualify for the credit.