Senior Vice President for State Fiscal Policy
As states develop legislation to adapt their tax laws to the new federal tax law, corporate lobbyists and anti-tax advocates are trying to capitalize on the legislative process to secure state tax breaks that they’ve been seeking for years. If they succeed, states will lose tax revenues that they otherwise could be allocating to strengthen schools, infrastructure, and other state services by, instead, providing even more tax breaks for the wealthy and profitable corporations — sometimes with virtually no public debate or awareness.
Because most state corporate and personal income tax codes, as well as estate tax laws, piggyback on the federal Internal Revenue Code, changes to the federal code often require states to adjust their own tax codes to avoid unintended consequences. In other years, these state adjustments have been relatively innocuous.
This year, however, the massive changes that the new federal tax law generated and the process through which it came to fruition — rushed through Congress and enacted just days before many states began their legislative sessions — have created a climate in which states are making very big, and often unwise decisions very fast. As we’ve written, that’s a big mistake.
Already, states such as Georgia, Oregon, and Idaho have enacted or fast-tracked complicated and expensive tax laws that contain hidden provisions that will weaken state revenue systems in coming years.
State lawmakers are defending their moves to enact big new tax cuts by saying that without them, state taxes could rise for some taxpayers. But, wealthy individuals and profitable corporations will get new breaks they’ve been advocating for years, not only wiping out any possibility that the new federal tax law will generate new state revenue but even leaving states with less revenue than they would have had before. Meanwhile, on top of the federal tax cuts that they received, the well-to-do and profitable corporations in these states may get new tax cuts at the state level.
Take Georgia. After learning that the state might gain new revenue from the federal tax law, Georgia’s legislature passed — and the governor signed — a bill that will cost the state $400 million a year when its provisions are fully phased in. The hastily enacted plan includes cuts to the top individual tax rate, which the legislature rejected in past years, that will mostly benefit Georgia’s wealthiest taxpayers. Because the plan reduces income tax rates and the Georgia constitution bars increases to the top rate, the state will have a particularly hard time raising needed revenue for its schools and other public services in the future. The long-term fiscal situation will be even worse if the federal windfall fails to materialize.
Or take Oregon. A law to conform state taxes to the new federal tax law became an excuse to move towards repealing an effective 2013 law that limits corporations’ ability to cut their taxes by shifting profits they earned in the state to their subsidiaries in foreign tax havens. Corporate representatives argued that Oregon no longer needs the law because the state can piggyback on new federal rules to prevent international profit shifting. But those rules have just taken effect, and many experts question how effective they’ll be. Previous state estimates have indicated that the anti-tax-haven law is worth $28 million a year to the state, but its repeal as part of the conformity legislation flew through the legislature. (It’s now awaiting Governor Kate Brown’s signature, so there’s still reason to hope that she will reject it.)
Or take Idaho, where, after learning that it would receive an estimated $100 million from the federal tax changes, the state enacted income tax cuts that will cost roughly $200 million — a net loss of $100 million in revenue.
These hastily enacted cuts, built on imprudent decision-making, should be serious red flags for other states that have not yet passed laws to conform their taxes to the new federal tax law. States should approach conformity this year with caution, given uncertainty about the ultimate impacts of the federal changes, the likelihood of sharp cuts in federal aid for states, and the certainty that another recession will hit at some point — leaving states wishing they had enough revenue to protect their schools and other essential services.