The 2017 tax-code overhaul opened up opportunities for states looking to capture revenue from multinationals, but as statehouses adjust their tax codes to conform with the new federal law, businesses are pushing back.
At least 16 states are considering or have adopted changes to their tax code in response the new federal international-tax rules. Other states have yet to bring up legislation or don’t have legislative sessions in 2018, though eventually all states will need to address the issue, said Stephen Kranz, partner at McDermott Will & Emery and a member of the STAR Partnership, a business group working to deter states from adopting new taxes as they conform their code to the federal law.
“There’s been a focus at the state level on the impact of federal tax reform on individual-income-tax regimes, but the understanding and discussion of the impact of federal tax reform on corporate-tax regimes is just beginning,” Kranz said.
Indeed, much of the conversation about state conformity has been on the individual side of the code, but looming are the vastly more-complex international provisions for corporate tax written into last year’s overhaul bill.
At issue are two key points in the international portion of the bill: a repatriation tax that targets profits accumulated off-shore, and the so-called GILTI, or global intangible low-tax income, designed to reduce the incentive for companies to shift corporate profits outside of the U.S.
Millions of dollars in state revenue are at stake as lawmakers look to boost income while balancing pressure from the business community to avoid raising taxes.
To raise the billions needed to pay for lower corporate rates and transition to a new international-tax regime, Congress decided to create a mandatory, onetime tax on the $2.5 trillion in U.S. multinationals’ earnings stored abroad. The tax rate varies—15.5 percent on liquid assets, 8 percent on illiquid assets—but it’s lower than the 21 percent corporate rate on domestic earnings.
That could still amount to a huge tax bill for companies with lots of foreign profits, such as retailers, oil giants, and tech companies like Apple, so Congress allowed them eight years to pay off the “deemed repatriation” tax.
But Nicole Kaeding, director of special projects at the conservative-leaning Tax Foundation, said for states that match their tax code to the federal code, a process called conformity, the deemed-repatriation tax could be due sooner.
Legislatures will be faced with a choice: take the money, or offer a workaround for taxpayers such as decoupling the international provisions of the tax bill from their own code. Taxing the income would be a departure for most states, which typically do not collect on foreign-sourced income.
“The argument that’s been made by many in the corporate world is that it this would be a large tax increase at the state level,” Kaeding said.
Kaeding said that if states do take the deemed-repatriation money, they should treat it as a onetime windfall, as Oregon has. Oregon has not incorporated that income into its revenue baseline and instead directed it to a rainy-day fund.
Lawmakers in Minnesota are grappling with this question. Home to major multinational companies such as the retail giant Target and the industrial conglomerate 3M, Minnesota’s legislature is considering several bills that would address how the state handles the federal international-tax rules.
A Senate version would decouple the deemed-repatriation provision from state tax law, while a House version would tax a percentage of that income. The bills are in a conference committee between the two chambers and a final version could emerge within days.
More than 50 companies—including Minnesota-based Target, 3M, Best Buy, and General Mills—are fighting the deemed-repatriation tax through their group, the Minnesota Business Partnership, the Star Tribune reported.
“It’s unconstitutional because there is really no nexus between the state of Minnesota and the money that’s been overseas,” group Executive Director Charlie Weaver said.
Weaver said if Minnesota moves to collect tax on the repatriated income, it would likely spark litigation. As in many other states, critics of the state tax on repatriated earnings say that conforming to the new federal international provisions extends the state tax base beyond the water’s edge. States may still collect some of that repatriated income, they say. Companies are likely to use some of that cash to pay dividends to shareholders, which could then be taxed at the individual level.
But time is waning on reaching a tax deal in Minnesota. The legislative session ends May 21. If the state fails to agree on a conformity deal, it could end up like Kansas, which adjourned its legislature in early May without reaching a deal.
Similar down-to-the-wire negotiations are playing out in statehouses across the country. Indiana returned Monday for a special session after it failed in March to advance a conformity bill in its regular legislative session.
Kranz said that his group is in talks with several state tax agencies about short-term, regulatory solutions should state lawmakers fail to reach a deal.
Also on tap for state lawmakers will be addressing provisions in the federal tax law meant to deter multinational companies from shifting profits overseas, such as the 10.5 percent corporate GILTI tax for foreign income on intangible assets like intellectual property.
Kaeding said some states would need to pass new legislation to collect on the GILTI provision, because unlike deemed repatriation it relies on a new section of the federal code. That makes adopting unlikely on a mass scale, she said.
For some states, existing law may allow companies to avoid paying a GILTI tax at the state level through a deduction on dividends received, according to Kranz. Florida, which enacted a bill adopting the GILTI provisions, may be one of those states, he said.
At least one state has backtracked on collecting revenue from GILTI. Georgia originally decided to adopt the GILTI provision, but after outcry from businesses, it reversed course in the final week of the legislative session in March, dropping it from the state tax code, Kaeding said.
“There are a few states that will end up taxing these, but there will be lots of litigation dealing with apportionment,” she said.