States Waiting Until 2019 to Address Business Tax Changes

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By Che Odom and David McAfee

States likely will wait until 2019 to react to the business provisions of the new federal tax act after they’ve had time to assess what impact it might have on revenue.

That’s according to tax practitioners who track legislative developments around the country.

“So far what you have seen from most states is related to individual taxes,” or simply conformity to the federal tax before Jan. 1, 2018, Joe Crosby, a principal with MultiState Associates, told Bloomberg Tax. “I don’t think you will see much when it comes to business taxes,” possibly until next year.

The business provisions are “pretty complex stuff,” he added.

Some legislatures, which have short sessions or convene bienially, might reconvene later in the year to revisit tax issues, as revenue officials in all states continue to try to figure out the economic impact of the 2017 federal tax act ( Pub. L. No. 115-97).

Also, most states conform, to some extent, to the Internal Revenue Code. The new federal law eliminated many deductions and exemptions, broadening the base of what’s taxable, which means states that conform to federal law will see greater revenue without raising rates.

The business provisions, however, are difficult to dissect. For example, the law calls for the deemed repatriation of business income, which raises a host of questions for states that may tax that money, including constitutional ones.

Littany of Issues

Many states are looking into ways of mitigating any increased burdens on their taxpayers—individuals and businesses. But the new federal treatment of foreign business income, expensing, accounting for losses, and partnerships make business taxes more complex than those levied at individuals.

While the individual income tax is getting most of the attention, some states have, in some measure, reacted to some of the business provisions. For example, Pennsylvania legislators may rescind a state revenue department bulletin that required companies to add back any benefits incurred by full expensing of capital purchases ( H.B. 2017).

Georgia, Idaho, and Oregon are among states that have voted to conform to the federal tax code prior to Jan. 1, with plans to possibly conform to parts of the most recent federal changes after they have more time to evaluate the impact of conformity.

Waiting ‘Makes Sense’

The business provisions are not as well-known to the public, so there is less political pressure to immediately address them, Max Behlke, director of budget and tax with the National Conference of State Legislatures, told Bloomberg Tax.

“This year, you will see more individual changes and some other stuff at the state level as far as taxes go, with a more thorough, in-depth look at corporate and business taxes after states have seen the federal law operate for a quarter or two,” Behlke said.

Companies benefited considerably from the federal changes, so most are willing to wait for states to react, Behlke said. Legislatures in four states, including Texas, don’t meet this year, so waiting is unavoidable.

“It makes sense for states to wait and see how these provisions, such as the repatriation of foreign income, impact their states,” he said. “They don’t want to make a revenue mistake of a couple hundred million dollars.”

Caught Off Guard

Several states were “caught unaware” by the federal tax plan’s changes regarding repatriation of offshore money—and are unprepared to deal with them, Multistate Tax Commission Counsel Bruce Fort said Feb. 9 during the American Bar Association Section of Taxation’s Midyear Meeting in San Diego.

A “skinny state in the west” released a revenue report recently that stressed the importance of taking “immediate action” in response to federal changes, but couldn’t suggest what that response should be, Fort said.

“That’s really where a number of states are,” Fort told attendees.

Only about 13 to 14 states tax income that is subject to the Internal Revenue Code’s Subpart F. With the repatriation tax taking effect as of 2017, “it really caught the states flat-footed,” Fort said.

“They just did not have an opportunity to say, ‘Should we try to bring some of this repatriation income into our tax base?’ It’s too late,” he said. “The 2017 year has come and gone.”

To contact the reporter on this story: Che Odom in Washington at codom@bloombergtax.com and David McAfee in San Diego at dmcAfee@bloomberglaw.com

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

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