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February 12, 2019

State Impacts of TCJA Analyzed at Urban Institute

Glasses sit on top of tax form.

The Urban Institute & Brookings Institution recently hosted a conference examining state responses one year after passage of the Tax Cuts and Jobs Act (TCJA). Topics discussed included:

  • conformity of state and federal tax bases;
  • international business as a source of state revenue; and
  • state workarounds to the TCJA’s limit on the deduction for state and local income taxes.

Federal-State Tax Conformity after the TCJA

According to John Hicks the biggest struggle for the states was the timing of the legislation. Governors had mostly already finalized their budgets. This meant legislatures had to craft a response. Most ended up making sure the effect on revenue was neutral or there was a reduction.

Leila Kleats and Jennifer Budoff mentioned that Colorado is one of five states with rolling conformity to the federal code. Colorado has not yet passed any legislation in response to the TCJA. The state will now have the opportunity to pass legislation based on the effects of the TCJA.

The TCJA changes led to a $50 million dollar increase in the District of Columbia revenue. Jennifer Budoff stated that this conflicted with the progressivity goal of the District’s recent tax revision. The net revenue increase fell on families earning under $200 thousand.

Carley Roberts mentioned that one issue is that states are still in the process of issuing guidance. Specifically, she mentioned the issues surround global intangible low-taxed income (GILTI) and foreign derived intangible income (FDII).

State Responses to TCJA’s International Provisions

The next panel discussed state responses to the international provisions in the TCJA. The discussions focused on:

  • IRC Sec. 965; and
  • IRC Sec. 951A (GILTI)

Helen Hecht stated that federal government was supposed to be policing shifting of income, particularly arm’s length pricing of intangibles.

Shirley Sicilian raised several issues with repatriated income. Repatriated income includes income earned over 30 years. How do states deal with income earned over time but only realized now? Apportionment is based on current conditions and it may not represent how the income was earned. Under the unitary business principle income arising from a single economic enterprise is apportioned by the state. However, if the income does not arise from the business it must be separately allocated. Generally, for GILTI and repatriated income it would be allocated to the place of commercial domicile.

Alysse McLoughlin mentioned that states had been trying to police these transactions through tax haven legislation. She questioned if repatriation could even be taxed under Kraft v. Iowa Dept. of Revenue. Specifically, separate reporting states could have a similar issue to the one Iowa had in Kraft. Another problem is that states may need to figure out apportionment factors for the past 30 years to apportion the income. Regarding GILTI, in many cases the income is not generated because of intangibles overseas but because the company has operations on the ground.

Outlook for Federal Tax Legislation in the Year Ahead

Tiffany Smith discussed the dim prospect for federal tax legislation in the coming year. She touched on:

  • extenders;
  • possible bipartisan legislation;
  • Senator Wyden's priorities; and
  • the possibility of a technical corrections bill.

Aftermath of Blue State Resistance to TCJA

The next panel discussed how some states have responded to the TCJA’s adverse impacts. Kim Rueben stated that:

  • only about 6% of taxpayers will see a tax increase; and
  • the number of taxpayers itemizing will drop from 47 million to 19 million.

Kim Stark discussed how some states were smuggling in the SALT deduction through other mechanisms. Specifically, using charitable contributions. Mark Yopp detailed some options the state had considered or adopted. These include:

  • reclassifying certain state tax payments as charitable contributions;
  • creating employer-based payroll taxes;
  • a lawsuit filed by CT, MD, NJ, and NY challenging the cap on the SALT deduction; and
  • possible enactment of a pass-through entity tax.

Leslie Samuels discussed the Treasury Department proposing regulations that would address the use of the state charitable tax credits.

Perspectives of State Tax Administrations and Multistate Businesses on Post-TCJA State Taxation

The final panel discussed administration going forward. Loren Chumley stressed that clients are looking for certainty. Fitzroy Lee reiterated that the District had been moving to a more progressive system of taxation. While the TCJA undid some of that work, the District would continue with its conformity. LeAnn Luna mentioned that there will not be good information on the effect of the TCJA until 2021.

How Are States Responding to the Tax Cuts and Jobs Act?, Tax Policy Center Urban Institute & Brookings Institution, January 29, 2019

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