By Eric Berman
October 10, 2018
As mentioned in our previous insight, the Tax Cuts and Jobs Act of 2017 (Public Law 115-97) made significant changes to individual and business tax provisions. The sweeping tax reform changes also included a number of changes that affect state and local governmental entities. The following is a summary of some of the changes made in addition to the widely-reported adjustments to individual income tax.
Incentive Contributions, Conformance to the TCJA and Other
The following discusses TCJA changes regarding the ever-popular economic incentives provided to corporations by state and local governments, including so-called decoupling or skirting the TCJA provisions to maintain revenues, the recent Supreme Court decision South Dakota v. Wayfair, Inc. and operational concerns where the TCJA may impact state and local governments. South Dakota v. Wayfair held that states may charge sales tax on purchases made from out-of-state sellers, even without a physical presence in the state. Clearly, the ruling targets internet sales.
Governmental incentive contributions.
Prior to the new tax reform act, a government or governmental entity could provide a beneficial incentive to a business to move into the state or local area by abating taxes, contributing land or other property to the business, particularly if the business operated as a corporation for tax purposes. This incentive was a better benefit for a business operating as a corporation, because the corporation did not pay tax on the contribution of land or property by the government. The property was excluded from taxable income as a contribution to capital, and that tax result was only available to corporations. However, that all changed with the passage of the TCJA. Incentive contributions made after December 22, 2017, except in those cases where a master development plan was approved before December 22, 2017, will be taxable to the receiving corporation
To conform, or not conform to the TCJA.
One of the more important decisions a state or local government that has taxing power will make during 2018 will be to decide if they will conform totally, a little, or not at all with the tax reform changes made by the TCJA.
The basic question is thus: how will the TCJA affect a government’s tax revenue if the government fully conforms to the TCJA?
Governments of high income tax states have come under scrutiny from the IRS for trying to address the negative impact on revenues due to the $10,000 federal limitation on state and local tax deductions. Some governments are attempting to decouple state and local taxation from TCJA provisions. As an example, the state of New York created a Health Charitable Account and an Elementary and Secondary Education Account, both of which are charitable trusts. New York taxpayers would have a way to contribute to these accounts as a charitable deduction instead of a tax, therefore evading the $10,000 cap. On or after January 1, 2019, the contributions would result in an individual tax credit equal to 85 percent of the donation.
The IRS has issued Notice 2018-54 in response to the New York action not allowing states to evade the cap as the funds were controlled by a state or local government. It is unclear if there will be legal challenges to the charitable trusts or to the IRS notice at this juncture. What is equally unclear is whether non-federal tax systems can allow for such donations and credits while the federal system does not have such an allowance.
Employer responsibility changes to consider.
While the topic is too large for this summary article, we want to mention that the TCJA has many changes to employer responsibilities that can affect governmental operations the way same they affect private business. New payroll changes for the individual tax rate reduction, changes to certain fringe benefits paid, moving expenses, family and medical leave all need to be reviewed, as they will adjust the taxable reporting of employees and can create administrative issues in implementation for almost all governmental entities.
In conclusion, governments should not lose sight of the fact that the TCJA has an impact on their entities. Governments should consider all these issues on their operations, as they may want to revisit whether state tax incentives should be on the chopping block, considering the reduction in individual and business taxes. Such incentives have become highly politicized, and with the TCJA provisions, it’s important to consider whether the incentives could be ending.
Although not a part of the TCJA, the recent Supreme Court decision in South Dakota v. Wayfair may give governments increased sales tax revenue opportunities to weigh against the potential income tax adjustments. These changes will be a strong cause for detailed analysis. A further wrinkle may occur in sales taxes as well; Congress has recently introduced bipartisan legislation for a national online sales tax because of the Wayfair decision, so expanded municipal sales taxes may not be far behind.
If you need any additional information on one of the items above, or if you have additional questions, contact a member of the Eide Bailly Governmental Services Group for assistance.