Issues & Insights

State Voters Weigh In On Taxes — With Some Surprising Results

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The 2020 election cycle saw electoral surprises across the board. Republicans now look to hold on to their U.S. Senate majority if they can hold two runoff elections in Georgia in January. Democratic losses in the House were another surprising result, as national pundits had projected Speaker Nancy Pelosi to pick up additional seats. Also defying projections, Republicans had a big night at the state level, picking up the governorship of Montana, both chambers in New Hampshire, and likely the Alaska House. Democrats failed to flip even one state legislative chamber or governor’s office.

While the national elections dominated the news coverage, many states tasked voters with ballot measures to decide critical policy questions. Many of these ballot measures will impact their pocketbooks — and state economies — for years to come.

Some good news for state taxpayers came from Colorado and two very unlikely sources: California, and Illinois. At the writing of this article, California voters are rejecting Proposition 15 by a slim margin, preserving property tax protections for commercial property owners. If Prop 15 had passed, California job creators would have seen their property tax bills increase by as much as $12.5 billion annually. In a major win for the state’s economy and the future of innovation, California voters also approved Prop 22, protecting rideshare drivers’ right to work as independent contractors. If California rejected Prop 22, it is likely Uber and Lyft would have ceased operations in California and thousands of rideshare drivers would have lost their jobs.

Colorado voters approved the only income tax reduction passed by any state in 2020, reducing the flat state personal and corporate income tax rates from 4.66% to 4.55%. This tax cut will save taxpayers an estimated $154 million annually.

Colorado is also famous for having one of the most effective tax revenue and spending limitations, the Taxpayer’s Bill of Rights (TABOR), adopted as a constitutional protection by voters in 1992. However, over the years, elected officials have exploited a loophole in the tax revenue limitation. At TABOR’s inception, state-owned enterprises only comprised approximately $1 billion in exempt revenue, but this figure grew to $15 billion by 2017 as lawmakers created more TABOR-exempt enterprises. To close this loophole this year, Colorado voters approved Proposition 117 and the state is now required to seek voter approval for any new state-owned enterprises with estimated annual revenue exceeding $100 million. Prop 117 reaffirms the popularity of TABOR.

Illinois voters rejected a constitutional amendment that would have permitted a graduated income tax. This represents a significant blow to Gov. J.B. Pritzker’s policy agenda, as he hoped to use the new tax revenue to close Illinois’ chronic budget deficit. Rather than changing course and trying to improve Illinois’ fiscal standing by reprioritizing spending alone, Gov. Pritzker has indicated he still intends to raise taxes on Illinoisans. For a state ranked 47th in economic outlook in the ALEC-Laffer “Rich States, Poor States State Economic Competitiveness Index,” higher taxes will only mean lost economic growth as other states continue to outcompete Illinois for new investment. In the meantime, Illinois taxpayers can cheer the defeat of a measure that would have raised taxes by an estimated $3.6 billion annually.

Not all successful ballot referendums represent an improvement in state tax policy. Arizona voters approved Proposition 208, raising Arizona’s top income tax rate from 4.5% to 8%. Now that Prop 208 has passed, Arizona has the ninth highest top personal income tax rate in the nation, and income taxpayers will owe nearly $1 billion in increased taxes annually. Worse yet, Prop 208 significantly erodes Arizona’s economic competitiveness compared to other states. Increasing the top income tax rate to 8% and raising taxes by $1 billion annually will likely cause Arizona’s economic outlook ranking to nosedive from 10th to 20th , according to Rich States, Poor States.

In another setback for pro-growth policy, Florida voters approved a measure incrementally increasing the state minimum wage to $15 per hour over the next five years. Unfortunately, even though the minimum wage increase was supported by voters after a well-funded campaign effort by supporters, the consequences for Florida’s economy remain. Rich States, Poor States estimates Florida’s economic outlook ranking will fall from seventh to 11th once the minimum wage reaches $15 per hour.

The National Federation of Independent Business (NFIB) expects small businesses to bear the brunt of a $15 minimum wage. If small businesses cannot afford to hire new employees, not only will businesses close, but workers will lose their jobs as well. Worse yet, employees who would have been hired and received job training and experience no longer have the same opportunity. Without job training made possible by market wages, many potential employees will not see potential wage increases from being a more experienced employee.

The NFIB estimates if a similar policy were enacted on a national scale, employment would drop by 1.6 million jobs and cause economic output to decrease by $2 trillion. Florida has made significant strides toward a pro-growth economic policy environment but raising the minimum wage to $15 per hour may cause Florida to lose potential economic growth and make it even harder for small businesses struggling through the COVID-19 pandemic.

While the presidential and congressional elections were the focus of the 2020 election for the national media, key policy matters were decided by voters in their respective states. California and Colorado voters sent a message to lawmakers that tax revenue limitations are popular and efforts to tear down taxpayer protections will be defeated at the ballot box. Illinois voters similarly voiced their support for a flat, low personal income tax rate. In a state well-known for fiscal waste, fraud and abuse, it is likely Illinois voters expect lawmakers to cut spending first before raising taxes.

The results of these important ballot referenda demonstrate that taxes and state economic competitiveness are salient issues to many voters, and the ballot box provides taxpayers another avenue to hold government accountable and keep taxes in check.

Jonathan Williams is the executive vice president of policy and chief economist at the American Legislative Exchange Council (ALEC). Follow him on Twitter @taxeconomist. Skip Estes is the legislative manager at the ALEC Center for State Fiscal Reform. Follow him on Twitter @Skip_Estes.

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