State Income Tax Speculations

The only certainty when speculating on the state income tax fallout of the tax agendas put forth by the presidential candidates (which assumes they are supported by the legislature) is increased complexity.  Regardless of who is elected, there will be provisions of the federal tax code that will increase federal taxable income, and there will be provisions that decrease it.

For states that key off the federal law as their starting point for state income tax:

  • Provisions that decrease federal taxable income also decrease state taxable income.  To the extent such provisions are too costly to a state, the state can either decouple from the provision (as many states have done with bonus depreciation), completely overhaul their taxing regime (Texas is a good example with its gross receipts tax), or except the change and either make up revenue elsewhere (such as sales tax increases) or do without and cut services.  An example of a decrease, would be repealing the federal estate tax.  Two-thirds of the states base their estate tax on the federal law, so they would have to decide whether to create an estate tax of their own.
  •  Provision that increase federal taxable income also increase state taxable income.  A state is less likely to decouple from a federal provision if it increases the state’s revenue.  In certain instances however, a state may either decouple from a federal provision or revamp its taxing regime in order to appease an industry that has a strong lobby, etc.  A good example here would be the oil and gas industry.  If for instance, the federal provisions relating to the expensing of intangible drilling costs or percentage depletion allowance are repealed, certain states may be inclined to create a state tax credit or a state deduction designed to offset the increase in the state’s starting point for the income tax (federal taxable income).  Such a carve-out would theoretically put the company in no worse shape in the state, at least for state income tax purposes, than prior to the repeal of the provisions.

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