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States see revenue increases coming from federal tax bill

State tax systems are directly affected by federal tax changes because nearly all states conform to the federal code in some way. For example, in 36 states, taxpayers start their state income tax form by using the gross income, adjusted gross income, or taxable income figure from the federal return. Nine states have no income tax, so that leaves just six states where taxpayers must start from scratch. This conformity—shadowing federal provisions—reduces tax compliance costs and generally makes things easier for everyone involved.

Several provisions of the federal bill affect states that conform to them:

  • Standard Deduction & Personal Exemptions. The federal bill roughly doubles the standard deduction while eliminating personal exemptions. All states may also see a revenue gain from greater usage of the standard deduction; the federal bill is expected to reduce itemizers considerably, and most taxpayers file the same status for both federal and state tax returns.
  • Pass-Through Provisions. The federal bill includes a 20 percent deduction for nonservice business income, subject to income limits. This deduction would likely reduce state revenue significantly, but it is difficult to estimate it precisely. States should therefore be cautious about conforming to this provision.
  • Estate tax. The federal bill doubles the estate tax deduction level, which would result in somewhat minor revenue losses.
  • State and local tax deduction (SALT). The federal bill places a maximum $10,000 deduction for property plus either income or sales taxes. No state allowed taxpayers to deduct SALT from their state taxes, in large part because it would be circular, so the cap will have little impact to state revenues. 
  • Repatriation. Both bills impose a one-time tax on repatriation of ~$2.6 trillion of overseas assets. The tax is “deemed” and is paid immediately, not when assets are repatriated as in an earlier repatriation holiday. States will receive a windfall from this, although it will be uneven based on where international companies have state tax liability. 

Read more at The Tax Foundation.

TaxOps Takeaway

One immediate impact businesses can expect is an uptick in enforcement as state's seek to increase their revenue streams. In upcoming weeks, we'll address the heightened scrutiny businesses can expect in the wake of the federal tax reform legislation and issue updates on the broader impact on state and local tax issues as they become available.

Read more

The impact of the federal Tax Cuts and Jobs Act on individual states is impacted by conformity. See related blog Does your state's corporate income tax code conform with the federal tax code? for an analysis by The Tax Foundation

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Judy Vorndran can be reached at jvorndran@taxops.com or 720.227.0093. Follow Judy on LinkedIn.

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