States No Longer Fretting Over Federal Tax Reform This Year

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 Tripp Baltz

The pressure to go into special session or take immediate action this year in response to federal tax reform no longer exists for state lawmakers and governors

State officials, keeping tabs on what’s happening in Washington, aren’t scrambling to plan responses before the next tax year to potentially sweeping changes to federal tax law.

Many of them just don’t believe the Republican-controlled Congress and President Donald Trump will get anything done on that front before the end of the year.

Colorado House Speaker Crisanta Duran (D) told Bloomberg BNA it doesn’t seem likely Republicans will be able to stick to their previous timetable, given the “scandals and dysfunction” they’re facing.

Even House Speaker Paul Ryan (R-Wis.) told reporters May 24 that discussions of border adjustments and other facets of federal tax policy would continue through the summer and that tax legislation was probable by the end of December.

Congress will first work on a bill to repeal and replace the Affordable Care Act and then the federal budget, both of which also greatly impact state budgets.

“Tax reform is not going to happen, that’s what I think,” Max Behlke, director of budget and tax policy for the National Conference of State Legislatures, told Bloomberg BNA. Behlke doesn’t believe the Senate will have a health care bill to repeal and replace the Affordable Care Act by August, after which Congress will address the debt ceiling and reauthorization bills.

“That’s a lot of work,” he said. “And then Ryan has a different plan on taxes than the White House’s messaging.”

‘Growing Disbelief’

At the beginning of the year, Behlke was receiving calls from state lawmakers asking about the timing of tax reform. He no longer receives those calls—possibly because states have been preoccupied with their legislative sessions or they just don’t think tax reform will happen this year, he said.

“There is growing disbelief that tax reform will take place,” he said.

In late April, Colorado Gov. John Hickenlooper (D) voiced concern to CNBC about the impact the Trump tax plan would have on states. Now, Hickenlooper said “tax reform doesn’t appear to be one of the highest priorities of this administration.”

Lack of Bipartisanship

Montana state Rep. Zach Brown (D) told Bloomberg BNA he remembers when Sen. Max Baucus (D-Mont.) spent the final years of a 36-year career in the U.S. Senate trying to build support for bipartisan tax reform.

“If it was too big a lift then by a seasoned coalition of statesmen, it is almost certainly out of reach to this hyper-partisan Congress and the dysfunctional Trump administration,” Brown said, adding that the state isn’t likely to need a special session to respond to Washington. Montana is one of several states on a biennial legislative cycle that could be most impacted by sweeping tax reform this year.

Karl Frieden, vice president and general counsel of the Council On State Taxation (COST), said “a natural lag time” between when a federal tax law is enacted and states react always exists, which means states probably wouldn’t be taking action this year even if federal tax reform passes.

Still, states aren’t just sitting by—they are pressing members of Congress on proposals being discussed, such as full and immediate expensing of capital investments and the potential elimination of the state and local deduction, Frieden said.

While the GOP wanted to get tax reform done this year, the real deadline is probably the 2018 elections, he said.

In 1986, tax reform lowered rates and broadened the base, he said. “You have that this time around plus many other items that weren’t around then,” such as moving to a territorial tax system, border adjustments and 100 percent expensing, Frieden said.

To contact the reporters on this story: Tripp Baltz at TBaltz@bna.com and Che Odom at COdom@bna.com

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

Copyright © 2017 Tax Management Inc. All Rights Reserved.