Thanks to a marriage of convenience between federal tax law and many tax codes, some states may get a boost in revenue from last year’s overhaul bill. The question is, will they keep the money—or give it back to the taxpayer?
The sweeping tax legislation passed by Congress in December did away with personal exemptions, deductions for taxpayers and their dependents, until 2025. Because of a practice called conformity, in which states couple their own codes to federal law, changes in the tax overhaul like eliminating personal deductions may mean that some state-level tax breaks disappear as well.
“This is a huge area of debate now at the state levels,” said Nicole Kaeding, director of special projects at the Tax Foundation. “Everyone said that when federal tax reform happened, that tax reform was done. All we did was move it from one capital to 50 capitals.”
Some states are already considering legislation to make the federal tax-bill revenue neutral for their jurisdictions, while other states, hit by reductions in tax revenue, may be considering pocketing some of the money.
In Utah, changes in the tax law, largely driven by the elimination of personal exemptions, may mean an increase of $50 million to $80 million in annual revenue, said David Damschen, the state treasurer.
Some in Utah say the money should go back to taxpayers. But the revenue could also help relieve systemic pressures on state budgets, such as unstable gas or sales-tax income, and the state’s growing infrastructure needs.
“So there’s quite the triangulation of these various vectors, moving targets within the revenue picture, and our legislature is trying to work through those things,” Damschen said.
The Tax Foundation has kept track of most states that have a published analysis of the revenue impact from last year’s tax bill. Kaeding stresses that each state is unique, but out of the 17 the organization has studied, 15 will get a bump in tax income.
Eighteen states and the District of Columbia have a “rolling” conformity with the federal tax code, meaning that they automatically change their tax law to match the federal government’s, and 19 states must update their “fixed-date” conformity to take up the new changes, according to the Tax Foundation. Other states conform their tax code on a selective basis.
In New York, conformity issues with federal tax law will bring in an additional $1.1 billion in fiscal 2019. That’s largely because the exclusion of federal personal exemptions affects whether a New York taxpayer is eligible for the state standard deduction for single filers, according to a report by the state government. The tax overhaul’s doubling of the federal standard deduction could discourage New York taxpayers from itemizing on their state taxes as well, the report said.
Georgia could see an additional $4.7 billion over the next five years, according to The Atlanta Journal-Constitution. Gov. Nathan Deal introduced legislation that would cut the revenue jump by 75 percent over the same time period, a move spurred by state lawmakers seeking reelection this year, the newspaper reported.
In Vermont, the governor has proposed legislation to prevent an increase of $30 million in state revenue in fiscal 2019. The bill would reintroduce a $4,000-per-member-of-household exemption and create a Vermont-defined income deduction of up to $12,000, among other changes.
Vermont Treasurer Beth Pearce said her state will proceed cautiously, though. Taxpayer behaviors can change, and the analysis is preliminary, she said.
“The [state] administration has put together some proposals, the legislative body has taken a look at it, so there’s a dialogue going on about that right now, but I think that we tend to be conservative and don’t count dollars until we know that they are there,” Pearce said.
Both Pearce and Damschen spoke to National Journal Monday during the annual legislative conference for the National Association of State Treasurers in Washington.
Not all states will see an uptick in revenue from their tax code’s linkage with federal laws, however. Montana, Oregon, and four other states have their tax laws tied to federal law for pass-through entities and would be hit by the tax overhaul’s new deduction of up to 20 percent for companies like S-corps and partnerships. Both Montana and Oregon stand to lose at least $40 million in fiscal 2019, and both are examining ways to decouple their pass-through provisions from federal law, Kaeding said.
Tax-code conformity isn’t a new concept, and neither is the issue of big federal-code changes affecting states. By conforming their tax codes to federal laws, states can use IRS guidance to clarify tax questions. It can be easier on the taxpayer as well.
“It makes it simpler for the tax filer because they can literally copy lines from their federal 1040 to their state returns, and it also makes it easier for the state to administer the state tax code,” Kaeding said.
States grappled with similar issues after the 1986 tax-code overhaul.
For Damschen and other state officials, the full impact of the federal tax bill hasn’t yet been calculated. But whether Utah fully passes on the revenue to the taxpayers or uses some of the funds to shore up sagging revenue elsewhere, Damschen said his state is likely to advance some sort of tax-code overhaul of its own soon.
“Our budget director feels that it will take us a good couple of years to really fully digest and understand the ultimate impact of federal tax reform, and by the time two years have gone by we’ll probably have some sort of reform in our state tax policies,” Damschen said. “So a lot of moving targets, and I think it will be a time of rapid change.”