Trump tax law poised to create windfall for states

Trump tax law poised to create windfall for states

 


(How will it affect taxpayers if states don’t act quickly)

The Hill
Reid Wilson
1/09/18

When President Trump signed a massive tax overhaul late last month, congressional Republicans celebrated a job accomplished. But the work is just starting for state legislators, who are likely to see hundreds of millions of dollars in new revenue.

Under the new law, budget analysts say taxpayers who receive a break on their federal forms are actually likely to spend more on their state taxes, unless state legislators act. And that’s setting off contentious fights between those who want to use the money to boost state budgets and those who want to return money to the taxpayers.

“Now we get to do tax reform in all 50 states,” said Nicole Kaeding,
an economist at the nonpartisan Tax Foundation.

Most states conform parts of their tax codes — like definitions set by the IRS or deductions and tax credits for mortgages and children — to the federal code. But states set their own tax rates independently. The federal tax overhaul eliminates some deductions, broadening the tax base at both the state and federal levels.

“The tax revenue that we get in the state is dependent in some cases on the federal government,” said Joyce Peppin (R), the majority leader in the Minnesota House of Representatives.

That many means taxpayers could soon be on the hook for higher state tax bills.

The reform package “made the federal base of taxation broader, and it lowered the rates. The states couple to the base, but they set their rates independently,” Kaeding said. “Assuming their rates don’t change, which would be a proactive change, then states would have more revenue.”

The federal overhaul limits the amount of state and local taxes that filers can write off, potentially giving huge windfalls to some states.

Other provisions of the tax overhaul will leave states guessing just how much money they can expect to take in. While things like the state and local deduction are easy to estimate, provisions like a cap on mortgage interest deductions are harder to calculate, Kaeding said.

And for legislators who have to balance their state budgets every year, that uncertainty is unsettling.

Maryland’s Bureau of Revenue estimated the state’s taxpayers would pay $450 million more in state taxes and $300 million more in local taxes every year under the new law. Gov. Larry Hogan (R) has said he will introduce legislation to give that money back to local taxpayers.

Colorado Gov. John Hickenlooper (D) has taken the opposite approach. He has asked his legislature to add $300 million in new spending, revenue that will come from the federal tax overhaul.

Some states anticipate higher revenue for other reasons. In Iowa, one of six states that allow taxpayers to deduct their federal taxes from their state returns, the Department of Revenue estimated that the federal rate cuts would generate $138 million in new revenue.

In Michigan, where tax filers can claim the same number of federal deductions on their state taxes, fewer federal deductions means taxpayers will pay more to state government.

Other provisions of the tax overhaul will leave states guessing just how much money they can expect to take in. While things like the state and local deduction are easy to estimate, provisions like a cap on mortgage interest deductions are harder to calculate, Kaeding said.

And for legislators who have to balance their state budgets every year, that uncertainty is unsettling.

“Every time you have a change that you’re conforming to in the federal law, it’s somewhat a guess how much effect that’s going to have on your state revenues,” said Brent Hill (R), president of Idaho’s state Senate. “And when you’re guessing, you don’t have to be off very far to find yourself with a shortfall or an average you wish you hadn’t charged the taxpayer.”

Earlier efforts to overhaul the federal tax code also left states fighting over how to handle the new windfalls. After the last major tax reform passed in 1986, most states cut taxes. Indiana stood out as an exception, using some of the new revenue to boost spending.

“We need to make sure that we have everybody, across the board, seeing real, meaningful tax reductions,” said Robin Vos (R), the Speaker of the Wisconsin Assembly.

Read the article HERE. (all emphasis mine)

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Accounting Today
Michael Cohn
January 3, 2018

State governments are worried about the potential loss of tax revenue after passage of the Tax Cuts and Jobs Act, and may be forced to restructure their tax laws.

New York Governor Andrew Cuomo (D) announced plans Wednesday to sue the federal government over the new tax law, which limits state and local tax deductions to a maximum of $10,000 (see Cuomo plans to sue U.S. government over state tax break change).  Update on this NY Law Journal says suit faces huge hurdle.

Other states such as California are considering similar workarounds, such as having employers take out state income taxes as payroll taxes, or allowing taxpayers to make voluntary “gifts” of their taxes to the state that would be deductible as charitable donations.

States are also putting renewed pressure on e-commerce companies to charge sales taxes on online purchases.

States may be forced to rely more heavily on sales taxes if income tax collections go down as a result of the Tax Cuts and Jobs Act. “There’s a bunch of states out there now that have budget deficits,” said Peterson. “It’s a bipartisan thing. Almost every Republican governor and almost every Democrat governor sees this as at least a partial solution to whatever funding problem they have.”

Peterson pointed out that 31 states faced some type of revenue deficit in fiscal 2017, and 22 states still collect less tax revenue than at their pre-recession-era peaks, after adjusting for inflation.

Read the article HERE.

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Mintz Levin
Employment Matters
January 3, 2018

Prior to the effective date of the tax bill recently signed by the President,  Section 164 of the Internal Revenue Code permitted individuals who itemized deductions to deduct state and local income and other designated taxes (SALT) in calculating their Federal taxable income.  Congress amended Section 164 for years beginning after 2017 and prior to 2026 to limit SALT deductions to $10,000 per year and, as a practical matter, to sharply reduce the number of taxpayers who will be itemizing deductions and thus able to take advantage of even this limited deduction.  By contrast, the new tax legislation does not restrict the ability of employers to deduct payroll taxes to which they are subject.

Even with a reduction of compensation equal to the relief from state taxes, employees would benefit on an after-tax basis since they would not have to pay federal income tax on the state taxes they are no longer paying. Inevitably, though, reducing the compensation of employees by the amount of state and local income tax being shifted from them to their employer would raise a host of issues related, among others, to employment agreements, union contracts, overtime exemption considerations and retirement benefits to name just a few. The administrative burdens on an employer would also be daunting.

Read article HERE.

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Looks like tax lawyers and accountants are about to earn their fees. It is inevitable that change brings panic and then determination to incorporate the change.

Instead of wasting money on lawsuits (especially ones that have little chance of advancing through a constitutionally run court of law) and that eat up income needed by a state, the obvious choice is to dig in and make the changes advantageous to those it affects.

I am sure there are many crooks, in business and as individuals, out there who are already at work figuring out how they can line their pockets. The average citizen (like me) will have to hope state tax  employees have done the job adequately so that their payroll reflects the savings promised and that those submitting their taxes are up on the current changes.

I, for one, sure hope a single postcard style tax form per year really will be the result. Of course, a lot of tax preparers and online tax companies are going to be biting their nails to figure out how they fit into the system if it does happen. 

–Uriel–

 

 

About Uriel

Retired educator and constitutionalist
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6 Responses to Trump tax law poised to create windfall for states

  1. Whitetop says:

    If I recall Congress did not address the Alternative Minimum Tax which would simplify the returns of many people if it were deleted from the books. I would be happy to be able to fill out a postcard instead of having to have a CPA prepare my tax return every year.

    • Uriel says:

      Really? I thought that was one of his main talking points. Making deductions high enough to avoid need for anything but EZ form.

      • Whitetop says:

        Excuse my ignorance but the AMT has been a sore point for a long time and I don’t know if removal of the AMT would allow you to file EZ form. Depends on your income and deductions I guess. I would have thought getting rid of the AMT would have brought about above the fold headlines: Congress gets rid of AMT. I never read anything like that. My knowledge on tax laws is I hate all taxes.

        • Uriel says:

          Not. Up on any of it either Whitetop and I get hives when I do so hopefully someone with better understanding can enlighten us

          • Whitetop says:

            Guess we aren’t going to get any help Uriel.

            • Uriel says:

              lol Whitetop I guess, either everyone is in a “wait and see mode” since nothing has filtered down yet or else like me has “IRS-ittis” which isn’t fatal but does present a few issues like anger management syndrome and hives..

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