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Impact of potential tax reform on state tax codes
Taxand USA provides an analysis on the proposed federal tax reform and how states may react.
Since the release of the House Republican tax reform Blueprint in June 2016, which was shortly followed by the release of the Trump proposal later that summer, there has been endless discussion of the proposed tax reform and what the ramifications will be at the federal level. Significantly less discussion, however, has been devoted to the impact this reform will have on state taxing regimes.
The fact that states will be affected is a foregone conclusion; state tax codes rely heavily on federal tax concepts and the framework provided by the Internal Revenue Code. In fact, you can’t get past the first line of many state tax returns without contemplating federal tax law, as most states adopt the federal definition of taxable income as a starting point for calculating state taxable income.
Before diving into a discussion of specific elements of the proposed federal tax reform and how states might react, it is necessary to address how states conform to the Internal Revenue Code. As mentioned, most states conform, at least in part, to the Internal Revenue Code. The way in which states conform, however, is the threshold consideration when evaluating the impact federal tax reform will have on state tax codes.
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With so many uncertainties left to be resolved when it comes to federal tax reform, it is difficult to get a clear picture of exactly how these changes will affect state taxing regimes. What we do know, however, is that states rely heavily on the structure provided by the Internal Revenue Code, and as a result, at least some change is inevitable.