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State Tax Codes Up for Review After Federal Tax Overhaul

• States should reconsider credits, exemptions, deductions 
• Volatile revenue, pressure to cut taxes are factors 
• Some states are more transparent than others 

(Bloomberg Law)—States must reconsider every part of their own tax codes as they figure out the impact the new federal tax act will have on their finances, an official with a government excellence and efficiency group said.

As states evaluate changes in taxpayer behavior and state revenue, they also should debate whether their state-level tax expenditures are meeting revenue and policy goals, said William Glasgall, senior vice president and director of state and local initiatives at the Volcker Alliance.

“States are going to have to open up their tax codes,” he said during a Feb. 21 event in Sacramento sponsored by the University of California-Berkeley Goldman School of Public Policy and the Volcker Alliance. “It's really time for all the states to think about how much revenue they forego.”

Tax Transparency

Some states are better positioned to examine their tax codes than others, Glasgall said. For example, California's Franchise Tax Board issues an annual tax expenditure report with detail on dozens of personal and corporate income tax items, as well as sales and use tax exemptions, fuel tax, and property tax items.

The most recent edition for the 2016-17 fiscal year showed California's state and local governments forego more than $60 billion in revenue each year.

At least 11 states “don't seem to know what they give away in tax expenditures,” Glasgall said. Those states include Alabama, Arkansas, Indiana, Iowa, Missouri, Mississippi, New Mexico, North Dakota, Ohio, South Carolina, and Wyoming.

State variations in tax expenditure disclosures are part of a November 2017 report from the Volcker Alliance, called Truth and Integrity in State Budgeting: What's the Reality. The alliance is a nonpartisan organization that studies government financing and accountability.
Volatile Revenue

California and other states that have volatile tax revenue due to reliance on personal income tax and capital gains could broaden their tax bases and reduce volatility, panelists said. States that don't tax services, like California, have gradually taxed a smaller share of economic activity even during periods of economic growth, Gabriel Petek, managing director and sector leader in the U.S. Public Finance States group at S&P Global Ratings in San Francisco, said.

So far, California has only made its tax system more volatile, Ann Hollingshead, senior fiscal and policy analyst for the California Legislative Analyst's Office, said. She pointed to voter approval of temporary income and sales tax increases in 2012 and approval of another measure in 2016 to extend the income tax increases until 2030.

States may also opt to capture some of the federal tax cuts on personal and corporate income “so they see less of the break,” Patrick Murphy, director of research and senior fellow at the Public Policy Institute of California, said.
Windfall Tax Surcharge

In reaction to the federal tax act, Assemblymembers Phil Ting (D) and Kevin McCarty (D) have introduced A.C.A. 22, which would impose a “windfall tax surcharge” on half of the federal tax cut for corporations with more than $1 million in revenue, according to Ting. The money would go to education, health care, taxpayer rebates, and expansion of the state earned income tax credit.

The measure would need voter approval because it would amend the state Constitution. It hasn't yet been referred to a committee for hearing.

Although states and municipalities may face pressure to cut local taxes because of a new $10,000 cap on the federal deduction for state and local taxes in the 2017 tax act (Pub. L. No. 115-97), panelists said California isn't likely to bow to that pressure.

“California has been very willing to tax itself at the state and local level,” Murphy said.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif., atlmahoney@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

The above story appeared in: 
Daily Tax Report: State