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:
- Standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. & 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.
- 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.
- Estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. . House bill repeals over time, while Senate bill doubles exemption. Under House bill, states with an estate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. will have to choose between constructing their own or repealing. Under Senate bill, conforming states will see revenue loss from increase in deduction.
- State and local deduction. Both bills replace existing deduction with a property tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state/local taxes paid, mortgage interest, and charitable contributions. 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 baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . Taxpayers will bear the full cost of state and local taxation, which would be a net increase for some high-income taxpayers.
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- RepatriationTax repatriation is the process by which multinational companies bring overseas earnings back to the home country. Prior to the 2017 Tax Cuts and Jobs Act (TCJA), the U.S. tax code created major disincentives for U.S. companies to repatriate their earnings. Changes from the TCJA eliminate these disincentives. . 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.
- Expensing. House and Senate bills introduce full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. 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.
- 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.