Tax Reform Friday: From Coast to Coast, Federal Tax Reform Involves State Taxation Policy


Tax reform has been the one of the top news stories for the past few months, with numerous tax experts, economists, political analysts, and accountants examining the impact of Pub. L. No. 115-97 on not only federal taxes but also state taxes. SALT deduction caps, along with the property tax prepayment frenzy in certain states, have received a lot of coverage. But a Hawaii financial institution tax also illustrates another issue for states: I.R.C. conformity.

Hawaii’s franchise tax on financial institutions is based on the organizations’ entire net income from all sources for the preceding calendar year (for fiscal-year taxpayers, the preceding fiscal year). However, for institutions that have net capital gains and would have a higher tax liability under the default franchise tax, Hawaii applies I.R.C. § 1201’s alternative tax: it is based on taxable income, minus the net capital gain, plus 4 percent of the gain for the taxable year.

Pub. L. No. 115-97 repealed § 1201, effective for taxable years beginning Jan. 1, 2018. Does this mean that Hawaii’s financial institutions alternative tax is immediately dead? The answer is a bit more complicated than just “yes” or “no.”

Many states conform to the federal tax code for their own tax codes, as recent Tax Foundation and Tax Policy Center reports explain. State conformity comes in generally two flavors: static and rolling. While rolling conformity means a state conforms automatically to changes to the I.R.C., Hawaii conforms on a static basis—to the version of § 1201 that existed on Dec. 31, 2016.

Per Haw. Rev. Stat. §§ 235-2.5(c) and 236E-4(c), the Hawaii Department of Taxation submits bills each legislative session to update conformity to the I.R.C. for income (subtitle A, chapter 1 of the I.R.C.), estate, and generation-skipping transfer (subtitle B) tax laws to the most current version. S.B. 2821 and companion H.B. 2394, introduced on Jan. 24, propose updating the I.R.C. version to which Hawaii conforms to Dec. 31, 2017.

So, is the Hawaii financial institutions alternative tax dead if Hawaii changes its conformity date? Haw. Rev. Stat. 235-2.3(b) carves out specific exceptions conformity, and lawmakers can always add the financial institutions alternative tax to this list, along with other provisions they prefer to keep instead of conforming to the I.R.C.

Make sure to tune into Bloomberg Tax coverage to keep up with Hawaii’s conformity legislation, as well as other states’ tax reform reactions.

Continue the discussion Bloomberg BNA’s State Tax Group on LinkedIn: Is your state considering changing its conformity date?

For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and impending changes, with pertinent cites attached.

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