Potential for Federal Tax Reform Lowers State Tax Dollars

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 Paul Shukovsky

The mere anticipation of federal tax reform has led some taxpayers to slow down estimated payments to state tax authorities, according to leading tax officials.

The top tax collectors in New York and Massachusetts said they are seeing a reduction in collections even before the final parameters of reform are forged.

“As an income state, one of the things we have seen which we have not seen without a recession is actually disappointing revenue from estimated payments,” Massachusetts Department of Revenue Commissioner Michael Heffernan said June 12. He described it as “a delay in capital gains and revenue realizations in anticipation of some tax reform.”

“Just in estimated payments, we are probably at a year and a half of disappointing quarterly reports, and that belies the strong economy we have,” Heffernan said at the Federation of Tax Administrators annual meeting in Seattle. “We are worried.”

It’s the same story in New York, said acting Commissioner of the Department of Taxation and Finance Nonie Manion. “We actually had to bring down our revenue estimates by $4.3 billion; the vast majority of that is through personal income tax. Withholding is down. We do think a lot of it is because of capital gains or lower income tax. People are doing as much as they can to try and hold on for this year.”

‘Out of the Woodwork’

Manion said that experts in her office were “skeptical” that anticipation of lower rates from federal reform could cause the reduced revenue. But she said that when they looked at the returns of people with the ability to manage when they would pay out capital gains, the impact of proposed federal reforms became clear.

Panel moderator Harley Duncan, a managing director in the New York office of KPMG LLP and a former long-time executive director of FTA, asked the assembled state tax administrators for a show of hands of who has seen a similar slow down in declarations or income tax growth. He scanned the audience and said: “I recognize Northeastern states.” And he said that was unsurprising, given that Republicans aim to substantially lower income tax rates for the top brackets.

Asked what element of the reform proposal is most consequential, Manion said without hesitation: “The 15 percent passthrough. The 15 percent rate for passthrough entities causes us a lot of concern.”

Said Heffernan: “When you change who pays, when you change winners and losers, the resistance comes out of the woodwork.”

The outlook for federal tax reform remains unclear as congressional Republicans and the White House continue to differ over how to proceed. Proposed legislative language now isn’t expected until after Labor Day. States and local leaders from mostly Democratic-leaning states have been vocal in protesting a plan to eliminate the federal income tax deduction for state and local tax payments.

To contact the reporter on this story: Paul Shukovsky in Seattle at PShukovsky@bna.com

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

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