The overhauling of the nation’s tax code, rushed through Congress in under two months and signed into law by President Trump at the close of business in 2017, is already making major waves. In the US, organizations are scrambling to take advantage of the new deals it offers them to repatriate assets, while internationally, as the European Commission announced that it will implement new higher rates upon primarily US-based Silicon Valley firms that are housed in the EU’s lower-tax countries, a move that is widely seen as a reprisal to the nationalist turn in US policy.
What has been less noted in all the hubbub about repatriations, deficits and trade wars is a (for-now) quieter struggle that’s playing out in a different arena — the state capitals. In fact, the one-time slashing of the corporate tax rate nationwide could differentially impact the same organizations at the state level as legislatures figure out how to respond to the dramatic shift in national policy. Paradoxically, this may mean taxes going up in many states. This post is meant to offer a few brief signposts as to how the struggle over the new tax law might play out on this level.
50 Different States Means 50 Different Tax Regimes
The US system of federalized politics offers wide latitude to state governments to determine policy in areas that are not explicitly placed in the realm of the federal government by the Constitution. Because of this, each state has a unique tax code with corresponding individual and corporate rates.
These rates vary widely. Wyoming and Montana, for example, have no state income tax and levy taxes primarily through sales transactions. Some other states, for example North Dakota and Delaware, have been able to make up for the weaknesses in an individual tax base by offering lower rates for business that comes there — a win for both the state governments that benefit from increased revenues they would be able to gain otherwise and for corporations looking for lower rates.
Although, many times, when federal tax law changes, the states follow suit, strictly speaking they are not required to. State governments may adopt parts of the new law they like while halting others.
The Corporate Tax Base at the State Level May Increase Significantly
The tax bill curtailed many tax breaks for individuals and corporations alike in the interest of putting a stop to the erosion of the nation’s tax base. In the specific situation of state corporate taxes, a study by Ernst & Young, LLP found that the amount of income potentially subject to taxation would increase by 12 percent because of the federal tax overhaul.
State governments are perfectly within their rights to keep the same corporate tax rates they’ve had going back before the law changed while following Congress in considering a wider amount of income taxable than they had previously. This means that state corporate taxes may rise in response to the federal slashing of them.
Of course, states calculate their corporate tax base using federal measurements, and their taxes are invariably lower than the federal rate. Nevertheless, there will be a struggle in every state capital about how best to respond to the tax overhaul. As Nicole Kaeding of the Tax Foundation in Washington, D.C., said, “All we’ve done is move [the fight for tax reform] from one capital to 50 capitals.” In states including Arizona, Pennsylvania and Vermont, the Ernst & Young study found that corporate taxes stand to increase by as much as 14 percent.
A Looming Fight to Define Tax Reform
Just because state governments have the ability to follow the government in increasing their corporate tax base does not necessarily mean that they will do this. Georgia passed a reduction in its corporate rate from 6 percent to 5.75 percent immediately following the federal overhaul. It’s reasonable to assume that many Republican-governed states will either follow suit in cutting corporate taxes or at least not raise them.
On the other hand, the governments of more populous liberal states, such as New York and California, may be unsympathetic to corporations that they see as having just been given potentially billions of dollars by the administration, and may seize the opportunity to increase their tax base.
State legislatures are all looking at the ways they could benefit in this respect. Colorado, for instance, could receive an extra $3.2-4.2 billion per year, and is already planning improvements in infrastructure. In divided statehouses like Minnesota, Democrats and Republicans are bickering already over whether to take the opportunity for increased revenues or give it back to individuals and organizations.
Whatever the outcome is of individual fights to define the new state tax policies, it is certain that the future of the US corporate tax regime is radically uncertain and in flux. This being the case, it’s more pressing than ever before that the leaderships of large organizations focus on a proper response that can get the most out of the new savings on investments while avoiding the pitfalls at whatever policy level.
Technological innovation based on sound and accurate data, combined with sophisticated methods to present information, can make a crucial difference in formulating such a response. This is precisely what is offered to users of Blueprint OneWorld’s entity management software platform. Please call or email us today to discuss the solutions it can offer to help your business get to firmer ground within a rapidly shifting landscape.