Individual Income Insight: States Begin Studying the Impact of Federal Tax Reform

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Pub. L. 115-97, the 2017 tax act (officially, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”), was enacted on Dec. 22, 2017, and dramatically overhauled the Internal Revenue Code. Now that the dust has begun to settle, states are beginning the process of deciding whether to conform to federal tax reform. This task will require states to forecast the budgetary impact of the amendments and then pass legislation conforming to or decoupling from the changes. 

The elimination and modification of deductions such as the personal exemption, mortgage interest deduction, and casualty loss deduction are likely to be revenue raisers for the states. On the other hand, changes to the standard deduction and the new pass-through entity deduction are likely to be revenue reducers, according to an article published by the National Conference of State Legislatures discussing the state impact of federal tax reform. 

Recognizing the need to act quickly with respect to conformity, several states, including Colorado, Michigan, Minnesota, Missouri, Montana, Oregon, and North Dakota, have already made significant progress with respect to determining the impact that the tax changes will have on state revenues. These states, among others, have published analyses, with varying levels of detail, indicating the impact that tax reform will have in their jurisdictions. 

Michigan Gov. Rick Snyder (R) released a statement and related graphic indicating that the repeal of the personal exemption would result in an $840 million tax increase in 2018 and upwards of $1.6 billion in 2019. The Minnesota Department of Revenue released a detailed preliminary estimate of revenue under the new tax regime that showed revenues increasing year over year in response to changes to the individual income tax. Missouri also released a fairly detailed analysis which indicated that changes to the standard deduction would reduce Missouri revenue by more than $516 million. 

Several states have gone a step further by introducing legislation to lessen the impact of tax reform on residents. For example, California introduced S.B. 227, which would allow a credit against net tax for amounts contributed to the California Excellence Fund as a way to circumvent the new cap on the state and local tax (SALT) deduction. The cap on the SALT deduction also prompted law makers in New York to introduce S.B.  6951, which would lessen the blow on taxpayers by providing a credit equal to any increase in federal tax liability resulting from the $10,000 limitation. 

Nearly every state legislature is scheduled to be in session during the beginning of 2018, according to the National Conference of State Legislatures 2018 Session Calendar.  As a result, state reactions to federal tax reform will likely take center stage over the next few months. 

For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and the impending changes, with pertinent cites attached.

Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: How is your state likely to respond to federal tax reform? 

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