Seven Things States Should Monitor in the Federal Tax Bill

December 4, 2017

As the Senate and the House begin to conference together the differences between their tax bills, here are seven key items state policymakers should keep an eye on:

  1. Standard deduction & personal exemptions. Bills roughly double standard deduction and eliminate personal exemption. If states conform, this is a revenue loss and a revenue boost, and should analyze to see the net impact.
  2. Pass-through provisions. House bill is a rate cap, while Senate bill is a 23% deduction. No state impact of House provision. If conforming states pick up the Senate version’s deduction, there would be a revenue loss.
  3. Estate tax. House bill repeals over time, while Senate bill doubles exemption. Under House bill, states with an estate tax will have to choose between constructing their own or repealing. Under Senate bill, conforming states will see revenue loss from increase in deduction.
  4. State and local deduction. Both bills replace existing deduction with a property tax deduction up to $10,000. Currently states disallow the state and local deduction so there is unlikely to be a revenue impact. Many taxpayers who currently take SALT will instead take the standard deduction, potentially adding to the state tax base. Taxpayers will bear the full cost of state and local taxation, which would be a net increase for some high-income taxpayers.
  1. Repatriation. Both bills impose a one-time tax on repatriation of ~$2.6 trillion of overseas assets. The tax is “deemed” and is paid immediately, not when assets are repatriated as in an earlier repatriation holiday. States will receive a windfall from this, although it will be uneven based on where international companies have state tax liability.
  2. Expensing. House and Senate bills introduce full expensing for a number of years (House version ends immediately, Senate phases out), and reduces interest deductibility. States should evaluate the net impacts of these provisions together when deciding conformity.
  3. Net Operating Losses (NOLs). House caps NOL carryforwards at 90%, Senate at 80%; both repeal carrybacks. Most states conform to this, or close to it. Choosing to conform will probably increase revenue overall, although NOLs can vary greatly year by year.

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