How is my state’s tax code impacted by federal tax reform legislation? The key to understanding how federal tax reform would impact each state's tax code and revenue is conformity.
States frequently seek to conform many elements of their tax codes to the Internal Revenue Code (IRC) to reduce compliance costs. And in general, states are more conformed on corporate income than individual income.
States tend to conform to either taxable income before net operating losses or taxable income after net operating losses. Forty-one states conform to one of these two definitions, two states have their own calculations of income, and the remaining states either do not tax corporate income or impose a statewide gross receipts tax.
What does this conformity mean in the context of federal tax reform? How states define their tax bases matters a great deal for potential revenue impacts. For instance, the federal tax changes in the Tax Cuts and Jobs Act expand the base of taxable corporate income in many different ways, such as limiting the deduction for net interest or the Section 199 domestic production deduction.
The federal changes include rate cuts to offset the broader bases, but states set their tax rates independently. Absent state-level changes, states would have a much larger tax base without correspondingly lower rates, leading to higher state-level revenue.
Read more at The Tax Foundation.
States have begun the arduous task of trying to understand the impact of the the federal Tax Cuts and Jobs Act on their state tax system. See related blog States see revenue increases coming from federal tax bill for an initial analysis by Joseph Bishop-Henchman at The Tax Foundation.
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