States grap­ple with new fed­eral tax code

Tax­pay­ers to come out ahead

The Washington Times Weekly - - Politics - BY DAVID SHERFINSKI

Vir­ginia law­mak­ers have a choice to make dur­ing the 2019 leg­isla­tive ses­sion: Take steps to change the state tax code or risk a $500 mil­lion-plus in­crease in their con­stituents’ state tax bills.

Though most state tax­pay­ers saw a tax cut at the fed­eral level, Congress’s changes to make the fed­eral stan­dard de­duc­tion more at­trac­tive could prompt them to forgo item­iz­ing on their Vir­ginia re­turns. Tax­pay­ers will come out ahead over­all, but their state tax bills will look a lit­tle big­ger — and the state’s trea­sury a lit­tle flusher.

States across the coun­try are grap­pling with sim­i­lar is­sues, as most saw a bump in their rev­enue in the first year un­der the new fed­eral tax code.

“The fed­eral changes broaden the tax base while low­er­ing tax rates, and only the base-broad­en­ing el­e­ments flow through to the states,” said Jared Wal­czak, a se­nior pol­icy an­a­lyst at the Tax Foun­da­tion. “So they still have their same rates — they would col­lect more rev­enue to the de­gree that they were con­form­ing to fed­eral law.”

Some states have re­turned the money to res­i­dents in the form of tax cuts or cred­its, as they grap­ple with chang­ing their tax forms to match the fed­eral changes.

In Mary­land, law­mak­ers ad­justed the state’s per­sonal in­come tax ex­emp­tions — which were axed at the fed­eral level — and made other changes.

Repub­li­can Gov. Larry Ho­gan said the state man­aged to stave off a po­ten­tial $3 bil­lion tax in­crease for state res­i­dents over the next five years.

In Ge­or­gia, law­mak­ers cut the state’s in­di­vid­ual and cor­po­rate tax rates and set those changes to ex­pire at the end of 2025, when many of the in­di­vid­ual tax ben­e­fits in the fed­eral law also are sched­uled to run out.

They also dou­bled the state’s stan­dard de­duc­tion, to $4,600 for in­di­vid­u­als and $6,000 for cou­ples, at­tach­ing the same ex­pi­ra­tion date.

All told, Demo­cratic Gov. Nathan Deal es­ti­mated the state tax cuts would to­tal $5 bil­lion over the next five years.

In Utah, law­mak­ers used a spe­cial ses­sion in July to ap­prove a $30 mil­lion ex­pan­sion of the state’s child tax credit, af­ter the pub­lic com­plained that a 0.05 per­cent in­come tax cut the leg­is­la­ture passed ear­lier in the year was in­suf­fi­cient.

The child credit change was aimed at soft­en­ing the blow, par­tic­u­larly for larger fam­i­lies, from the loss of the per­sonal ex­emp­tions in the fed­eral code. In 2017, tax­pay­ers had been able to take $4,050 ex­emp­tions for them­selves, their spouses, and qual­i­fy­ing chil­dren on their fed­eral re­turns.

But Vir­ginia is among those that punted the big de­ci­sions into the new year.

The state’s tax code typ­i­cally re­quires those who take the stan­dard de­duc­tion at the fed­eral level to also take it on their state re­turns.

The fed­eral changes es­sen­tially dou­bled the stan­dard de­duc­tion to $12,000 for in­di­vid­u­als and $24,000 for cou­ples, mak­ing it more at­trac­tive for tax­pay­ers.

But un­like Ge­or­gia, for ex­am­ple, Vir­ginia’s rates didn’t change and law­mak­ers haven’t made up the dif­fer­ence else­where, mean­ing those res­i­dents could end up pay­ing more to the Old Do­min­ion than they would nor­mally.

“By do­ing noth­ing, the state’s go­ing to get a whole hell of a lot of money,” said Mike Thomp­son, who heads the Thomas Jef­fer­son In­sti­tute for Pub­lic Pol­icy, a think tank in North­ern Vir­ginia.

Mr. Thomp­son’s group has a plan that would use the ad­di­tional money to dou­ble the state’s stan­dard de­duc­tion, off­set­ting some of the an­tic­i­pated hit, and lower Vir­ginia’s cor­po­rate in­come tax rate as well. “We want to give it all back,” he said. Vir­ginia Gov. Ralph Northam, a Demo­crat, says he wants to use about half of the an­tic­i­pated ad­di­tional money next year to ex­pand the earned in­come tax credit, while ac­knowl­edg­ing that other op­tions are in play.

But state­house Repub­li­cans say the gov­er­nor’s plan would ben­e­fit peo­ple who al­ready pay no fed­eral in­come tax and would re­sult in an ef­fec­tive tax hike on the mid­dle class.

“Be­fore we can con­tem­plate new spend­ing, the Gen­eral As­sem­bly will have to re­solve the gov­er­nor’s will­ing­ness to al­low by in­ac­tion a tax in­crease and the elim­i­na­tion of key de­duc­tions on mort­gage in­ter­est and prop­erty taxes,” said Repub­li­can Del. S. Chris Jones, chair­man of the House Ap­pro­pri­a­tions Com­mit­tee.

Last year, many states opened their leg­isla­tive ses­sions at the be­gin­ning of Jan­uary, just af­ter the fed­eral tax law passed in De­cem­ber 2017, leav­ing them lit­tle time to fig­ure out the new land­scape.

“I think they were very flat-footed,” said Meg Wiehe, deputy di­rec­tor of the In­sti­tute on Tax­a­tion and Eco­nomic Pol­icy. “We were even flat-footed, and we’ve been spend­ing the whole year try­ing to think about what the im­pli­ca­tions of var­i­ous changes would be.”

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