Over the past few months, governors from across the country have delivered their state-of-the-state addresses and presented state legislatures with proposed budgets for the upcoming fiscal year (collectively, "proposals"), with many including tax law changes affecting businesses and individuals.

While these proposals have been wide-ranging, and frequently with affordability top of mind, some trends have emerged, including:

• Conforming to and decoupling from provisions of Public Law 119-21, known as the "One Big Beautiful Bill Act" (OBBBA)
• Taxing foreign income
• Addressing tax incentives for data-center investment
• Imposing new taxes on digital advertising and social media platforms
• Reducing and eliminating personal income taxes
• Providing property tax relief
• Creating new and expanded tax credits

Meanwhile, governors in Alabama, Kansas, Kentucky, North Dakota, Tennessee and Wyoming did not mention new state tax changes in their proposals.

State legislatures are now acting on these proposals as numerous budget bills make their way through statehouses.

Corporate income tax proposals

OBBBA

OBBBA conformity has become one of the biggest corporate income tax trends in the governors' proposals. Many governors propose permanent or temporary decoupling, though some — as in Idaho¹ and West Virginia² — would fully conform to the new federal law.

New York's governor proposed, for both New York State (NYS) and New York City (NYC) tax purposes, to decouple from the bonus depreciation provisions for qualified production property in IRC Section 168(n), and from IRC Section 174A, which allows an immediate deduction of domestic research and experimentation (R&E) expenses in tax years beginning after December 31, 2024, and accelerated deductions for pre-2025 domestic R&E expenditures. For NYC tax purposes, the governor's proposal would also decouple from OBBBA changes made to IRC Sections 163(j) and 179.³

The Connecticut governor's proposed budget would decouple from certain OBBBA provisions, while conforming to select "new federal provisions which will positively impact Connecticut's economy." If the proposal is enacted, Connecticut would decouple from IRC Sections 168(n), and from IRC Section 174A for "income years 2022 through 2025."⁴ Starting in 2026 and thereafter, Connecticut law would conform to IRC Section 174A.

Massachusetts generally incorporates federal tax law changes (known as "rolling" conformity)⁵ for purposes of the state's corporate excise tax and has therefore automatically adopted many of the corporate tax changes made by the OBBBA. Massachusetts' governor, however, has proposed for the state to temporarily decouple from certain provisions of the OBBBA. Her proposal would decouple Massachusetts from IRC Section 174A for tax year 2025 and conform to this provision in 2026. For tax years 2025 and 2026, the state would decouple from the federal changes to IRC Sections 163(j), 179, 168(n), and opportunity zone rules. Massachusetts would conform to these provisions starting in 2027. (See Tax Alert 2026-0326.)

Similarly, a provision in the Rhode Island governor's proposed budget would decouple from IRC Section 174A, but only for 2026 and 2027. Meanwhile, Maine's governor is looking to partially conform to tax changes made by the OBBBA, adopting IRC Section 174's R&E expense changes for small businesses and phasing in conformity for large businesses. The governor's proposal would decouple from IRC Section 168(n) and update the state's reference to global intangible low-taxed income (GILTI) to net CFC tested income (NCTI). (Draft bill language for Maine is available here.)

Maryland's gubernatorial budget would conform to IRC Section 174's domestic R&E provisions starting in 2026, as well as the amendments to IRC Section 163(j). The budget proposal would decouple from IRC Section 168(n) and replace the federal bonus depreciation in IRC Section 168(k) with a Maryland-specific rule under which a 20% deduction would be allowed for eligible investments. (The Maryland budget book is available here.)

Non-OBBBA proposals

New York's governor has proposed extending the current top corporate franchise tax rate of 7.25% for taxpayers with over $5 million in business income through tax years beginning before January 1, 2030 (currently January 1, 2027) and the current 0.1875% capital base rate for three years, through tax years beginning before January 1, 2030 (currently January 1, 2027). The capital base was scheduled to expire this year.⁶ Separately, the New York City mayor's preliminary budget proposal includes provisions seeking state legislative approval to increase the NYC corporate tax rate to 10.8% (from 9%) for the financial sector and 10.62% (from 8.85%) for non-financial sector and increase the NYC unincorporated business tax rate to 4.4% (from 4%) for those with business income over $5 million.

A proposal from the Alaska governor called for the adoption of market-based sourcing using model language from the Multistate Tax Commission and the elimination of the corporate income tax by 2031. The Illinois governor's budget proposal would phase in the sunset of the cap on the net operating loss (NOL) deduction. Starting in FY2027, a business could apply the NOL deduction to its current-year tax liability until a cap of 20% of current earnings is reached, with the cap increasing over the next three fiscal years to 40%, 60% and 80%, respectively. The Pennsylvania governor's budget again calls for the adoption of mandatory unitary combined reporting. This would be done for tax years beginning after December 31, 2026, and it would preserve the currently scheduled corporate income tax rate reductions. New Jersey governor's budget would provide for "over 700 million in new revenue from closing corporate tax loopholes." The governor would cap NOL deductions for the highest-earning companies.

Pass-through entity taxes (PTET)

The Maine governor's proposal includes a new PTET, which applicable entities could elect starting in 2026. The New York governor's proposal would make various changes to the state's PTET regime, including when the election can be made, while the NYC mayor's preliminary budget would reduce the NYC PTET credit to 75%. The Massachusetts governor has proposed extending the state's PTET to include the 4% surtax on high-income earners.

Individual income tax proposals

Governors in several states are looking to reduce individual income tax rates, or phase out the tax altogether, while others are seeking to increase personal income tax rates on individuals with income over $1 million. West Virginia's governor has proposed a 10% reduction to the individual income tax rate, while the governors of Colorado and South Carolina are looking to enact additional rate cuts to the individual income tax. The Arkansas governor said that her budget allows the state "to make additional cuts to Arkansas' income tax … " Georgia's governor has proposed accelerating the reduction of the individual and corporate income tax rates to 4.99%, coupled with an individual tax rebate.⁷ Missouri's governor has said he supports the phase-out of the state's individual income tax, and wants such a measure to be included on the ballot this year. Voter approval this year would allow the legislature to enact implementing legislation in the next legislative session. The governor suggested that new revenue and safeguards "to ensure fiscal responsibility and protect against economic downturns" could include the expansion of the state's sales and use tax base to include services.

Hawaii's governor, on the other hand, has proposed pausing planned reductions of the personal income tax to shore up state revenues in anticipation of a potential budget gap caused by cuts in federal funding; in Washington State, the governor called upon the legislature to approve a Millionaires Tax, revenue from which would be used to expand eligibility for the working families tax credit and lower taxes on small-business owners. The governor said that small businesses should not have to pay business and occupation (B&O) taxes until they gross more than $1 million in revenue. Rhode Island's governor, starting in 2027, would add a new, fourth individual income tax bracket that would impose an 8.99% tax on income over $1 million, and would phase-out the state's tax on social security benefits over three years. Similarly, the NYC mayor's preliminary budget proposes a 2% rate increase to the NYC personal income tax rate for those earning $1 million or more, resulting in a top rate of 5.876% (from 3.876%).

In furtherance of stated affordability agendas, the New York governor also seeks to eliminate the state income tax on up to $25,000 in tipped wages per year for single filers earning up to $150,000 and joint filers earning up to $300,000. Arizona's governor proposed a $200 million tax cut package for the middle class, which would include an immediate increase to the standard deduction, a tax cut on eligible overtime and tip incomes, and a deduction for car loan interest.

Sales and use tax proposals

Alaska's governor proposed a temporary, "seasonal" statewide sales tax that would apply at a rate of 2% from October through March and at a rate of 4% from April through September, for tax years 2027 through 2033.⁸

Governors also are proposing to apply sales and use tax, and other transaction taxes, to online activity and technology. Similar to the new social media amusement tax recently enacted in Chicago,⁹ the Illinois governor for fiscal year 2027 proposed a new monthly social-media-platform fee that would vary based on the number of monthly active Illinois users on whom the social media company collects data. The rate structure of the proposed fee would be (1) for social media companies that have between 100,000 and 500,00 users per month, $0.10 per user each month; (2) for social media companies that have between 500,001 and 1 million users per month, $40,000 plus $0.25 per user each month; and (3) for social media companies that have over 1 million users per month, $165,000 plus $0.50 per user each month. The proposed fee is estimated to general $200 million in revenue in the first year of implementation. The Michigan governor, to protect Medicaid following federal cuts, proposed a new digital advertising tax that would apply across all media platforms.

Some gubernatorial proposals also address tax exemptions for data centers. Arizona's governor has called for the elimination of the data-center tax exemption and the imposition of a fee for water usage by data centers, while the Illinois governor has proposed a two-year pause on authorizing new tax credits for data centers. Washington's governor proposed eliminating a sales tax exemption for replacement-server equipment for data centers.

Arizona's governor also proposed a nightly fee on short-term rentals. Michigan's governor proposed to update the state's tax structure for internet gaming, sports betting and online gaming. California's governor would require delivery network companies with at least $500,000 in annual state sales through their platform to register as marketplace facilitators beginning January 1, 2027.

Other sales and use tax proposals put forth by governors include:

• New York — creation of a new a sales tax exemption for EV charging stations and a three-year extension of the sales and use tax exemption for vending machines
• New Mexico — elimination of the gross receipts tax on medical services
• Wisconsin — elimination of sales tax on several household goods and over-the-counter medications

Lastly, the governors of Florida, Michigan and Washington have included sales tax holidays in their budget proposals.

Property tax proposals

Some governors have proposed tax law changes that would provide property tax relief, while others have allocated additional money for education funding to help keep property taxes from increasing.

Oklahoma's governor called for a ballot measure that, if approved by voters, would freeze property tax growth. The South Dakota governor's budget plan would allow counties to replace the county share of property taxes with a half-cent sales tax. In Wisconsin, the governor said he is "hopeful" that a bipartisan agreement can be reached to provide property tax relief, which would, among other things, prevent property tax increases for Wisconsin homeowners. Iowa's governor, noting that property taxes have increased more than 10% over the past two years, said she is introducing a bill that will cap overall revenue growth for local governments and move property tax assessment from every two years to every three years, among other changes.

Utah's governor called on the legislature to enact policies "that right-size the property tax burden distribution between residential and commercial properties." Maine's governor said property taxes are "still too high for too many"; to help keep property taxes down, the governor included $46 million in her supplemental budget to maintain the state's commitment to pay 55% of educational costs. In Vermont, the governor's budget would dedicate $105 million to help reduce the burden of yet another property tax increase for residents; in Florida, the governor proposed eliminating non-school property taxes for homestead properties.

In New York, the governor proposed extending for three years the 50% tax rate reduction in NYS's real estate transfer tax and NYC's real property transfer tax for qualifying transfers to real estate investment trusts.

Tax credit and incentive proposals

The Illinois governor's proposal would modernize the state's research and development (R&D) tax credit so that it corresponds to the federal tax credit and could be transferred for a fee. A new tax incentive program, EDGE Essentials, would be created to provide benefits to independent grocery stores and pharmacies in a food or pharmacy desert.

The California governor's proposal would (1) create a new light-duty zero-emission vehicle incentive program, (2) extend for five years the CalCompetes tax credit program at its current level of $180 million in annual allocations through FY 2032/2033, and (3) create a tax credit against liability for diesel excise taxes to incentivize the in-state production of sustainable aviation fuel.

The Pennsylvania governor's budget plan would create new, and modify various existing, tax credits. A new Innovate in PA 2.0 program would provide $100 million to the state's innovation economy via the sales of Insurance Premium Tax Credits. A new economic development tool, the PA First program, would provide financial assistance for workforce training, job creation and retention, land and building costs, and machinery and equipment. The budget would streamline credit and incentive programs administered by the Department of Community and Economic Development by eliminating redundant or ineffective programs and investing in programs that have a broader reach and impact. For example, the Waterfront Development Tax Credit, the Video Game Development Tax Credit and the Manufacturing Tax Credit would be eliminated, and the AdvancePA tax credit would be created. The budget proposal would modify several tax credit programs, including the semiconductor manufacturing tax credit program, regional clean hydrogen tax credit program, and the local resource manufacturing tax credit program.

Nebraska's governor introduced the "Grow the Good Life Incentive" package, which will provide "significant tax credits to businesses of all sizes that grow their business and bring new, high paying careers here to Nebraska." Such businesses would be eligible for a 10% tax credit for 10 years.

The Connecticut governor's FY 2027 recommended budget adjustment would expand R&D tax credits to pass-through entities.

Delaware's governor proposed creating a film tax credit, while the Hawaii governor's proposed expanding the stackable film tax credits for productions hiring local crew and talent, and removing the credit cap on productions spending $60 million or more, including first-time streaming-service productions.

Maryland's governor would enhance the state's capacity to drive private investment through the DECADE (Delivering Economic Competitiveness and Advancing Development Efforts) Act of 2026. The DECADE Act would "overhaul the state's economic development strategy, modernize programs with a focus on high-growth sectors, streamline business support, and cut ineffective incentives to spur growth and create jobs over the next decade."

The Massachusetts governor's FY 2027 budget proposal would create a new tax credit of up to $5,000 for Massachusetts farmers that donate excess food to food banks and pantries and a new tax credit to incentivize the use of sustainable aviation fuel by airlines through 2028.

West Virginia's governor included in his budget proposal the expansion of the Historic Rehabilitation Tax Credit.

Other tax proposals

Governors have proposed a myriad of other state tax changes. The Washington governor's budget proposal would increase the B&O tax rate for prescription wholesalers and restrict the B&O tax exemption for insurance providers subject to the state's gross premiums tax to those entities that actually pay the premiums tax. The Connecticut governor's recommended budget provisions would modify the state's hospital tax. The Alaska governor's budget proposal would raise the state's minimum tax rate on oil production from 4% to 6% and impose a 15-cent-per-barrel fee. Lastly, a tax amnesty program is part of the Rhode Island governor's budget proposal.

Implications

Over the next few months, state legislatures will consider these gubernatorial budget proposals among other legislative initiatives and priorities. While some of these budgets could be enacted as proposed or with some modifications, state lawmakers may advance different proposals or recommend further study before later reintroducing similar or modified gubernatorial proposals. With the 2026 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 warranted.