Some States Are Making Moves To Raise Taxes On Small Businesses

As Connecting the Dots has reported in the past, MSCI’s partners at the S-Corp Association have been working for years to advance approval of state-level Pass-Through Entity Tax (PTET) reforms that bypass the federal $10,000 cap on State and Local Tax (SALT) deductions. These reforms allow businesses established as S-corps and partnerships to pay taxes at the entity level so those entities can deduct state taxes in full at the federal level.

Thirty eight states have adopted these reforms so far — only North Dakota, Pennsylvania, Delaware and Vermont have not approved PTET — but, as the S-Corp Association recently noted, some states are trying to undo the PTET regime while others are using it offset significant new taxes. For example:

• Budget proposals offered in New York state this year would have cut the state PTET credit to 75 to 90 cents on the dollar. Fortunately, Gov. Kathy Hochul (D) opposed the measures so the legislature did not approve them.
• Maine enacted SALT Parity reform earlier this year, but that measure also included a 10 percent haircut that diverted funds away from businesses and into the state’s revenue streams. The state also approved a two percent income surtax on individuals above $1 million. Taxpayers subject to that new tax will pay an extra $20,000 in state taxes for every million they earn, while splitting the new PTET credit $6,660/$740 with the state.
• Washington state has a PTET regime on the books, but recently enacted its first-ever personal income tax, a 9.9 percent tax (seventh highest in the country) on income exceeding $1 million.

The good news is that several states have moved to extend and/or improve their PTET regimes. California has extended its SALT Parity program through 2030 and added flexibilities around election timing and payments to reduce administrative burdens, Minnesota and Oregon have extended their programs through 2027, and Illinois made its PTET law permanent late last year.