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By Che Odom
States that want to follow retroactive provisions of whatever tax reform package comes from Congress this year probably wouldn’t worry about legal challenges.
State courts have shown a willingness to allow retroactive tax laws, while the U.S. Supreme Court has refused recent requests by taxpaying businesses to revisit one of its key holdings on the issue.
Normally, federal tax legislation is prospective, applying only to the future. But some Republican members of Congress are looking at doing it a little differently this time.
Rep. Mark Meadows (R-N.C.), chairman of the ultra-conservative House Freedom Caucus, and some others want parts of the bill to apply retroactively to Jan. 1, 2017, or another past date, so that taxpayers see an immediate benefit during the 2018 tax filing season. The retroactivity idea comes as some Republican lawmakers fret privately about the lack of a clear legislative victory so far and how it might affect their re-election prospects.
But retroactive changes are difficult to administer and would make a tax reform bill more expensive, while the economic benefits from such a move aren’t clear-cut, several lobbyists and former staff members told Bloomberg BNA.
Meadows will have a very difficult time getting approval for retroactive provisions, and many states, including North Carolina, probably won’t be inclined to follow in the footsteps of Congress if that means reduced revenue, a staff advisor to a ranking GOP member of the House told Bloomberg BNA on the condition of anonymity because he isn’t authorized to speak amid ongoing tax-reform negotiations.
“States might go along with revenue raisers if Congress were to apply them retroactively,” the staff member said.
Businesses have challenged retroactive state tax laws, including several this year, even petitioning the U.S. Supreme Court to take another stab at clarifying its 1994 opinion in United States v. Carlton. Justice Harry A. Blackmun, writing for the court, said that so long as Congress acts with “a legitimate legislative purpose” in mind, its tax laws, even retroactive ones, are constitutional.
The Supreme Court announced in May that it wouldn’t review challenges by IBM Corp., the Goodyear Tire & Rubber Co., and other companies to retroactive tax laws in Michigan and Washington state.
“The Supreme Court’s refusal to hear the recent cases out of Michigan and Washington struck a blow in the effort to stop states from passing retroactive tax legislation,” Jeremy Abrams, counsel in the tax group at Crowell & Moring LLP, told Bloomberg BNA. “As a result, states likely feel emboldened to take whatever means necessary to raise revenue, whether it’s passing a retroactive tax bill themselves or conforming to federal tax legislation that benefits the states.”
Taxpayers ought to consider the entire scope of any tax reform measures passed retroactively—revenue raisers and tax cuts—before raising any challenges, Abrams said.
But challenges to tax laws face an uphill battle.
Taxpayers would be “hard-pressed” to challenge on due process grounds enactment of federal tax legislation, including state conformity, effective retroactively to Jan. 1, Abrams said.
Recall Justice O’Connor’s famous line from her concurrence in Carlton that a “period of retroactivity longer than the year preceding the legislative session in which the law was enacted would raise, in my view, serious constitutional questions,” he said.
“The proposed tax reform would appear to fall within this period which many of us in the state tax community have adopted as the standard for passing constitutional muster,” Abrams added. “Therefore, while there may be an avenue to challenge any such legislation or conformity after the fact, the better course in the near term may be to lobby against conformity at the state level and/or begin analyzing and preparing for the effects of any proposals on the current year tax filings.”
To contact the reporter on this story: Che Odom in Washington at COdom@bna.com
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