Federal Law Could Expand State Corporate Tax Base by 12 Percent

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Che Odom and Ryan Prete

The nationwide average corporate tax base increase resulting from conformity to the 2017 federal tax act is 12 percent, according to a report released by the Council On State Taxation and Ernst & Young LLP.

The figure assumes no change in state law other than the Internal Revenue Code conformity date, the March 5 report said.

The new federal tax law ( Pub. L. No. 115-97) eliminates many deductions, provides treatment for the repatriation of foreign business income, allows full expensing for purchases of machinery, establishes a net income deduction for business investments, and changes many other aspects of the federal tax code.

The Joint Committee on Taxation estimates that the federal changes will result in a 10 percent reduction in corporation income taxes at the federal level. However, according to the COST/EY report, the changes will lead states to conform to federal provisions that increase revenue for them, broadening the state corporate tax base by a range of 7percent to 14 percent.

Karl Frieden, vice president and general counsel at COST, a Washington-based trade association representing almost 600 multistate corporations, told Bloomberg Tax that the report illustrates a nonfulfillment of the 2017 federal tax act.

“The intent of federal tax reform was to level the playing field internationally when it came to the corporate tax rate. However, the study shows that, inadvertently, tax reform has the opposite effect at the state level,” Frieden said.

The report’s findings reflect the inconsistent goals of the federal law and that the state disparity is completely unintentional, Frieden said.

“As a consequence, states will need to consider the outcome they want here,” he said. “States should evaluate their conformity to the law—what the higher rates could mean for business, investments, and jobs.”

Business Provisions in 2019

States conform to provisions of the Internal Revenue Code because it makes administration of tax systems easier and compliance for taxpayers less complicated.

Most state legislatures this year will act to conform to the federal code prior to Jan. 1, 2018, and pass individual tax measures. But states may wait until late in the year or even 2019 to conform to the new federal tax act and especially to address its business tax-related provisions, which are “pretty complex stuff,” Joe Crosby, a principal with MultiState Associates, told Bloomberg Tax.

Max Behlke, director of budget and tax at the National Conference of State Legislatures, also told Bloomberg Tax that states may want to wait to see how the new federal changes impact state revenue to better inform whatever legislation may be needed.

In addition to issues of conformity, states such as Louisiana, Nebraska, New Mexico, South Carolina, Utah, and West Virginia may be taking the opportunity of an expanded tax base, created by the federal law, to enact state tax changes that are otherwise unrelated to the federal code. Those changes could alter the corporate tax base in those states.

To contact the reporters on this story: Che Odom in Washington at codom@bloombergtax.com and Ryan Prete in Washington at rprete@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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