State Legislatures Seek to Offset U.S. Tax Code Overhaul

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By Jamie Rathjen

Several state legislatures are progressing with efforts to deal with the effects of the federal tax code overhaul on their state, whether through updates to their Internal Revenue Code conformity dates or separately from elements of the federal tax code.

The efforts of many states hinge on the removal of the personal exemption for tax years from 2018 to 2025 under the new federal law (Pub. L. 115-97), leaving the 21 states that in 2017 accepted federal Form W-4, Employee’s Withholding Allowance Certificate, to decide whether to preserve their own exemptions so there is no tax increase for residents.

Legislation introduced in 2018 includes a bill passed Feb. 5 in Idaho ( H.B. 355) to annually update the state’s static I.R.C. conformity date, but only to Dec. 21, 2017, which would exclude the changes made by the federal tax law. The bill was signed Feb. 9 by Gov. Butch Otter (R).

West Virginia also used its annual update to its static I.R.C. conformity date to preserve the number of personal exemptions residents may claim on state income tax returns. The bill (H.B. 4146), which passed the state House Jan. 26 and the state Senate Feb. 9, updated the state’s conformity date to Jan. 1, 2018, but removed the state’s dependence on the number of exemptions claimed on the federal W-4. The bill, which was requested by Gov. Jim Justice (R), was sent to him Feb. 15 for signing.

Nebraska’s legislature was considering a bill ( L.B. 1090) jointly proposed by state Sen. Jim Smith (R) and the Nebraska revenue department to maintain the state’s credit and retain the federal standard deduction as it existed before Pub. L. 115-97 was signed into law.

Georgia’s I.R.C. conformity bill ( H.B. 918) was proposed Feb. 13 by Gov. Nathan Deal (R) and would update the state’s conformity date to Jan. 1, 2018, while increasing the state’s personal exemption to $3,750 from $3,000. The bill also would allow Georgia residents to take the increased federal standard deduction with either standard or itemized state deductions, the governor’s office said Feb. 13 in a news release.

Michigan’s Senate was considering a bill ( H.B. 5420) to increase the state’s personal exemption to $4,800 from $4,000 by 2020. Michigan does not accept the federal W-4, but, like West Virginia, the Michigan bill would remove a provision stating that the number of state exemptions allowed depends on the number claimed on an individual’s W-4. The bill passed the state House on Jan. 25.

New Mexico’s legislature attempted to address the federal changes with a bill ( H.B. 367) similar to that of West Virginia. The bill would have preserved the federal personal exemption from 2017 for heads of households, as well as the number of exemptions that would have been allowed on the federal W-4 had the federal tax bill not been passed. The New Mexico bill passed the state House on Feb. 13, but the state’s legislative session ended Feb. 15 before the bill could be voted on in the state Senate.

Other than New Mexico, none of the states considering legislation were pressed for time. Georgia’s legislative session is to end March 29, and Nebraska’s session is to end April 18. The Michigan legislature is to meet throughout the year.

Proposals in Vermont, New York

The Vermont tax department proposed a plan Feb. 2 to the state Senate to introduce a personal exemption of $4,000 and standard deduction of $6,000 to ensure state residents would pay about the same amount of taxes in 2018 as 2017. Vermont’s deduction and exemption previously depended on federal amounts.

A draft bill based on the plan was presented Feb. 12 to the state legislature by Gov. Phil Scott (R). The tax department is to work with the legislature’s Joint Fiscal Office to further analyze the proposal over the next few weeks, the department said.

The budget proposed by New York Gov. Andrew Cuomo (D) for fiscal 2019 includes an opt-in payroll tax starting in tax year 2019. Employers would pay a 5 percent tax on all compensation exceeding $40,000 for each employee, the governor’s office said Feb. 12 in a news release. Potential participants would have to decide to opt in for tax year 2019 by Oct. 1, 2018, the office said.

In return, employees of participating employers would receive a credit in the amount of the payroll tax paid on wages to use toward their individual income tax return. The tax would be phased in starting Jan. 1, 2019, at rates of 1.5 percent in 2019, 3 percent in 2020, and 5 percent in 2021 and later, the office said.

Gov. Cuomo proposed legislation including the payroll tax plan Feb. 15.

Withholding Methods Updated

Other states are responding to the federal tax bill by updating withholding methods. Oregon delayed the release of its 2018 formula to Jan. 19 so adjustments based on the 2018 Internal Revenue Service withholding tables could be made to ensure compliance.

Louisiana revised its withholding formula Feb. 12 to account for changes based on the tax bill, the state revenue department said in the emergency rule adopting the new formula. The new formula took effect Feb. 16.

Colorado, which was not planning to release new withholding tables until the end of 2018, may have to update its tables, the state revenue department said Dec. 20, 2017, on its website. Colorado still is determining if its withholding requirements are to change this year, a spokeswoman for the state revenue department told Bloomberg Tax on Jan. 29.

Missouri updated its formula for 2018 on Jan. 22, but still is to release final withholding guidelines for 2018, the state revenue department said on its website. North Dakota directed employers to continue to use the state’s 2017 withholding formula until a formula for 2018 is released.

Vermont previously said it was to delay the release of its 2018 withholding tables because of the federal tax bill, but employers are to continue to use the 2017 withholding tables in 2018, the state tax department said Feb. 7 on website.

To contact the reporters on this story: Jamie Rathjen at jrathjen@bloombergtax.com. To contact the editor responsible for this story: Michael Baer at mbaer@bloombergtax.com.

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

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