VIDEO: Questions From Federal Tax Law Bedevil States

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By David McAfee

The new federal tax law is giving some states a difficult time as they venture into uncharted—and international—waters.

Predominantly Democratic, high-tax states are coming up with an increasing number of workarounds for certain aspects of the new tax law, such as especially the new $10,000 cap on the state-and-local taxes paid deduction, but will even more politics come into play when the changes push states beyond their shores?

If the states conform to certain aspects of the new federal law, such as the Global Intangible Low Tax Income (GILTI) provisions, they will extend further “beyond the water’s edge” than any state has in recent years, according to Karl Frieden, vice president and general counsel of Council On State Taxation (COST), a Washington-based trade association representing almost 600 multistate corporations

“It’ll be interesting to see—red, blue—whether it matters when the issue comes up as to should the states extend beyond the water’s edge because that’s exactly what’s going to happen here,” Frieden told attendees Feb. 9 during a panel discussion at the American Bar Association Section of Taxation’s Midyear Meeting in San Diego. “Should they do that? Whether they can conform and do it is one thing, but should they?”

Novel Tax Issues

The problems facing many states in the wake of the new tax law are largely novel in nature. That’s because the United States hasn’t seen major tax reform since 1986, and that was “quite different in several aspects,” according to Frieden.

“First of all, it was revenue neutral,” he said. “The second big difference was the Tax Reform Act of ’86 had the first two categories: lower tax rates, broadening the base, but it did not have the change in international tax.”

See interview here: https://www.bna.com/questions-federal-tax-m57982089398/

States are weighing these issues and others as they decide how to conform to federal laws, but some tax experts say they were simply caught off guard as to the sweeping nature of the changes. The states are still trying to figure out how to handle international income, according to Multistate Tax Commission counsel Bruce Fort.

“That’s really where a number of states are,” Fort said during the ABA panel discussion. “The Multistate Tax Commission’s litigation group has been holding some phone calls and that’s been kind of the theme: the states are struggling now to get their heads around some of these basic issues.”

To contact the reporter on this story: David McAfee in Los Angeles at dmcAfee@bloomberglaw.com

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

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