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States could find themselves in the unexpected position of managing a windfall of corporate investment projects if meaningful repatriation benefits are woven into a final federal tax reform scheme.
Jamie Yesnowitz, state and local tax practice and National Tax Office leader for Grant Thornton LLP, said Aug. 2 that options for a federal tax reform bill this year are “dwindling quickly,” but any final product could have wide-ranging implications for states.
At a minimum, states would have to decide whether to conform to any new federal provisions dealing with questions such as charitable giving, the mortgage interest deduction, retirement saving, and tax code simplification—depending on the language in the final bill, Yesnowitz said during a Grant Thornton webinar. However, states could also find themselves in the happy position of responding to a wave of economic development projects, triggered by investment-focused repatriation provisions embedded in a final reform scheme.
“There might be a big fight over the next couple of years if those types of repatriation provisions come through that provide big incentives for companies to come back to the U.S.,” he added.
Policymakers and business interests are eyeing strategies designed to repatriate an estimated $3 trillion in corporate earnings held in foreign jurisdictions. President Donald Trump’s administration has proposed crafting a repatriation tax holiday permitting corporate taxpayers to bring those dollars back to the U.S. at a lower tax rate.
Many lawmakers, however, would like guarantees that repatriated funds are reinvested in the economy. Previous campaigns to recover overseas profits have been criticized because corporate taxpayers used the funds to pay shareholder dividends and executive bonuses.
Yesnowitz said a repatriation program focused on investment would cause corporations to develop new products, engage in research, and build new facilities. He also said states would be asked to accommodate such development with tax credits and incentive programs.
Despite this possibility, Yesnowitz cautioned that tax reform remains a huge question mark in Congress.
“The efforts to achieve broad-based federal tax reform really haven’t gone anywhere. And with the battles down the pike—including raising the debt ceiling and signing a budget over the next month or two—the time to pursue a significant tax reform plan this year, I think, is dwindling quickly,” he said.
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