Potential state tax consequences of federal corporate tax reform
In this edition of Inside Deloitte, Valerie C. Dickerson, Scott Schiefelbein, and Kul Ahluwalia of Deloitte Tax LLP consider the potential state tax issues raised by key elements of the federal corporate income tax reform proposals of President Trump and House Republicans.
Most states generally begin the computation of state corporate taxable income with federal taxable income.1 Therefore, when there are changes to the federal income tax code, states are presented with the choice either to conform to or decouple from the federal changes. As many are aware, the most significant change to the federal income tax code since 1986 may be imminent, including several proposals for sweeping changes to the corporate income tax.
Both President Trump2 and the House Republican majority3 have released tax reform proposals. The Trump administration also released an updated one-page outline of a tax reform plan on April 26 that reiterated many of the tax reform proposals Trump made during his presidential campaign, including:
- Lowering the top corporate income tax rate to 15 percent,
- Applying a 15 percent rate to passthrough entities,
- Reforming the international tax rules,4
- "Eliminating tax breaks for special interests”, and
- Imposing a one-time tax on foreign accrued profits (a deemed repatriation), although the rate was not specified.5
The one-page plan omits several details of considerable interest to the tax community, and the Trump administration acknowledged that these details need to be developed. For example, in addressing the question of how the 15 percent rate would apply to passthrough entities, Treasury Secretary Steve Mnuchin stated that “the administration will ‘make sure that there are rules in place so that wealthy people can’t create passthroughs and use that as a mechanism to avoid paying the tax rate they should be paying on the personal side.’”6
The Trump administration and House GOP proposals have important differences, lack several technical details, and include a few specific proposals, such as the border-adjustable tax, that are generating significant controversy. Regardless of the potential headwinds, the current Republican dominance of Washington makes the enactment of significant tax reform this year a distinct possibility.
Given this reality, it is time to evaluate the potential state tax consequences of federal tax reform. The full extent of the state consequences is impossible to predict, especially given uncertainty about what sort of tax reform might eventually pass Congress, but we have enough information to make some general observations regarding potential state tax consequences of the Trump administration plan and House GOP blueprint.
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1 See generally Ruth Mason, “Delegating Up: State Conformity With the Federal Tax Base,” 62 Duke L.J. 1267, 1308 (Apr. 2013).
2 The Trump administration plan refers to policy statements and speeches made during Trump’s campaign and the one-page outline released on April 26. Trump Presidential Campaign, “Tax Reform That Will Make America Great Again” [hereinafter Trump Tax Reform]; Trump, Remarks at Detroit Economic Club (Aug. 8, 2016) [hereinafter Trump Remarks]; and Fact Sheet: Donald J. Trump’s Pro-Growth Economic Policy Will Create 25 Million Jobs (Sept. 15, 2016) [hereinafter Trump Fact Sheet].
3 House Republican Tax Reform Tax Force, “A Better Way: Our Vision for a Confident America” (June 24, 2016) [hereinafter House GOP blueprint].
4 Trump’s initial tax platform during the campaign called for maintaining the current worldwide system of taxation and repealing deferral of US tax on active foreign-source income; however, the April 26 outline called for transitioning to a territorial system.
5 Jonathan Curry and Luca Gattoni-Celli, “Trump Tax Plan Lacks Details, Sparks Revenue Concerns,” Tax Notes Today, Apr. 27, 2017 (quoting Saba Ashraf as saying, “Somewhat surprisingly, this plan is even shorter, and contains even less detail, than the plan [President Trump] campaigned on”).
If you have questions regarding this edition of Inside Deloitte, please contact:
Valerie C. Dickerson, partner and practice leader, Deloitte Tax LLP
Scott Schiefelbein, senior manager, Deloitte Tax LLP
Kul Ahluwalia, manager, Deloitte Tax LLP
The authors thank Jonathan Traub, Alex Brosseau, and Tom Cornett for their contributions to and review of this article.