State Tax News & Views: SALT Cap Workaround as Revenue Headache

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SALT Workarounds Present Revenue Headache for 2025 Tax Talks - Samantha Handler, Bloomberg ($):

State laws that sidestep the 2017 tax law’s limit on state and local tax deductions are bringing down the revenue gained from the cap, complicating congressional efforts to use it to fund tax cut extensions.

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Both progressive and conservative tax groups back outlawing the workarounds, though no federal legislation has been introduced yet to do so. Closing the workarounds will likely be part of 2025 negotiations, as much of the 2017 law expires at the end of that year, including the SALT cap.

The workarounds invite “a lot of complexity into the law for no good reason, other than to skim off whatever it is of the revenue that would otherwise go to the government from the imposition of the SALT cap,” said Kirk J. Stark, a tax law professor at UCLA.

The IRS opened the door to entity-level taxes to work around the $10,000 cap on itemized deductions for state and local taxes when it issued Notice 2020-75 in November 2020. Pass-through entity taxes have been enacted in 36 states. Each state's version is a little different, with varying rules for payment, electing the regime, whether the state provides an owner income exclusion or tax credit, and whether tax credits are refundable.

While Notice 2020-75 allows entities to deduct these optional taxes, questions remain over the timing of the deductions and the taxation and nature of any resulting refunds.

AICPA February 22 2024 map of adoption of PTE taxes

State Officials Urge IRS to Nix Direct File Program - Emily Hollingsworth, Tax Notes ($):

State treasurers and auditors from 18 states, the majority of which are Republican-led, described their concerns with the IRS’s direct-file program in a March 25 letter to U.S. Treasury Secretary Janet Yellen, Treasury Deputy Secretary Wally Adeyemo, and IRS Commissioner Daniel Werfel.

The IRS recently made its pilot program available in 12 states, allowing eligible taxpayers to electronically file federal tax returns directly on the IRS’s website for free. The Inflation Reduction Act of 2022 directed funding to the IRS to study the feasibility of a direct-filing program.

In the letter, the 21 state officials call for the IRS’s direct-file option to be terminated at the end of the pilot program, arguing that “Direct File will create challenges for taxpayers and state treasurers and the costs of Direct File far outweigh any potential benefits it may confer to taxpayers.”

State-By-State Roundup

California

Wealthy Californians Can Use Existing Strategies to Reduce Taxes - Marguerite Weese, Bloomberg:

A California bill to tax residents with more than $50 million in global income may have died in committee, but the ultrawealthy should still watch for potential wealth taxes. The state is likely to reintroduce a wealth tax due to a looming budget shortfall.

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Rather than focusing on uncertainty, high-net-worth individuals looking to reduce their tax burdens in California may want to consider their existing options: moving themselves or assets out of state, using irrevocable trusts, or exploring charitable tax reduction strategies.

Florida

Disney Succumbs to Ron DeSantis in Fight Over Florida Tax District - Robbie Whelan and Joseph De Avila, Wall Street Journal. "The confrontation crescendoed last year, when the Republican-controlled Florida legislature passed a law to strip Disney of its authority over the Reedy Creek Improvement District, a uniquely designed tax entity set up in the late 1960s that had given Disney extensive control over the governance of Walt Disney World’s land and infrastructure for more than 50 years."

Idaho

Idaho to Cut Income Tax Rate, Boost School Facilities Funding - Emily Hollingsworth, Tax Notes ($). "H. 521, which is backed by Gov. Brad Little (R), would lower the state's flat individual and corporate income tax rate from 5.8 percent to 5.695 percent, retroactive to January 1. It would also bolster funding for school facilities by more than $150 million annually to limit the amount of property taxes school districts would need to fund facilities. The Senate passed the bill on a 23–11 vote March 21 after the House approved it 61 to 6 on February 23."

Kansas

Kan. House Passes Tax Rate Cuts, Early End To Food Tax - Jaqueline McCool, Law360 Tax Authority ($). "The House substitute for S.B. 300 unanimously passed the lower chamber and now heads to the Senate for consideration. The bill would restructure the state's income tax rates for single and joint filers, reduce the state's bank tax to 1.63% and end the sales tax on food this summer rather than phasing it out under an existing plan. The first $100,000 in value of a residential property would also be exempt from tax under the bill."

Maryland

Maryland’s Worldwide Combined Reporting: To Be or Not to Be? - Andreay Yushkov, Tax Foundation. "Much of state revenue officials’ optimism regarding worldwide combined reporting comes from a report by the Institute on Taxation and Economic Policy (ITEP). The report, which made inaccurate assumptions about apportionment rules and global profit shifting, estimated corporate income tax gains from adopting worldwide combined reporting in Minnesota would be $418 million, about a third of total state corporate franchise tax collections. The Tax Foundation, COST, and other organizations have exposed the report’s faulty assumptions."

Missouri

Mo. House OKs Banning St. Louis Tax On Remote Workers - Paul Williams, Law360 Tax Authority ($). "St. Louis is one of two cities in Missouri that imposes an earnings tax on employee wages, with Kansas City being the other, but it is the only one that has taken the position that it can tax remote workers. Six remote workers sued St. Louis over the practice, and in 2023,Judge Jason Sengheiser of the 22nd Judicial Circuit Court ordered the city to issue them refunds, holding that the city illegally made an administrative change to its prior policy of providing tax refunds to workers for days worked outside the city."

Missouri House Sends Corporate Tax Phase-Out Bill to Senate - Angélica Serrano-Román, Bloomberg ($). "The House voted 100-50 to pass HB 2274, aiming to reduce the corporate income tax from the current 4% to 3%, effective Jan. 1, and to lower it annually by one percentage point until it would end by 2028. The rate had been 6.25% before it was cut to 4% in 2018."

Nebraska

Nebraska Lawmakers Advance R&E Deductions, Income Tax Safe Harbor - Emily Hollingsworth, Tax Notes ($):

The state’s Unicameral Legislature advanced L.B. 1023 and its amendments in a 35–0 vote on March 21. The bill would decouple the state from IRC section 174, which under the Tax Cuts and Jobs Act requires R&E expenditures to be deducted over a period of five years for federal tax purposes. Under L.B. 1023, businesses would be allowed an immediate and total deduction for eligible expenses, starting in tax year 2025.

The bill would also decouple the state from IRC sections 168(e)(6) and 168(k) to allow for an immediate and total deduction for expenses related to qualified improvement property or qualified property, respectively, starting in tax year 2025.

As amended by the Revenue Committee, the bill also incorporates provisions from five other tax bills, according to a March 22 legislative update.

Link: L.B. 1023

New Jersey

New Jersey Legislature Passes Bill to Increase Petroleum Tax Cap, Tax EVs - Matthew Pertz, Law360 Tax Authority ($). "If enacted, the bill would also institute a $250 fee on the registration or renewal of an EV. The fee would increase by $10 every year until it reaches $290 in 2028."

Link : A. 4011

New York

New York’s Convenience-of-Employer Test Stands on Wobbly Ground - Arthur Rosen, Michael Hilkin, and Jonathan Hague, Bloomberg:

New York law generally dictates that a nonresident employee’s income from New York sources is calculated based on the ratio of workdays spent inside the state to total workdays spent anywhere.

However, the “convenience of the employer” test, or convenience test, provides a radical qualifier by adding that “any allowance claimed for days worked outside New York State must be based upon the performance of services which of necessity, as distinguished from convenience, obligate the employee to out-of-state duties in the service of his employer.”

Tennessee

Tenn. House Panel OKs Corp. Tax Change, $800M In Rebates - Sanjay Talwani, Law360 Tax Authority ($):

On a voice vote, the House Finance, Ways and Means Subcommittee approved H.B. 1893, sponsored by Reps. William Lamberth, R-Portland, and Mark Cochran, R-Englewood, as amended.

If enacted, the measure would eliminate a component of the tax tied to property value, saving corporations $400 million per year, while allowing rebates of some past payments, at a cost of about $814 million in the amended bill, according to a fiscal note.

West Virginia

West Virginia bill phasing out tax on Social Security benefits signed into law - Bob Aalron, WCHSTV.com. "Retroactive to Jan. 1 of this year, it applies to taxes filed in 2025. After that 35% cut, the 2026 filing will drop 65% on Social Security income and then disappear in total when 2026 taxes are filed in 2027."

Wisconsin

Wisconsin Governor Approves Tax Reciprocity Study, Bullion Exemption - Paul Jones, Tax Notes ($):

Wisconsin’s governor has approved bills to explore resurrecting a tax reciprocity agreement with Minnesota, exempt bullion from sales tax, and close what critics called a loophole allowing home equity theft by localities.

S.B. 374, signed by Gov. Tony Evers (D) March 21, directs the Department of Revenue to pursue a study with the Minnesota DOR regarding how recreating a reciprocal income tax agreement would affect both states. The study’s focus would include the number of cross-border workers and the potential amount of tax revenues that would be forgone by each state if they create a new reciprocal income tax agreement. The study is intended to facilitate negotiation of a new agreement.

Vermont

Vermont House Approves Corporate Tax Increase - Benjamin Valdez, Tax Notes ($):

House lawmakers amended and approved H. 721 via voice vote on March 27. The bill, as amended, would increase the top marginal corporate tax rate from 8.5 percent to 10 percent and require taxpayers to add back federal deductions for global intangible low-taxed income and foreign-derived intangible income to their Vermont taxable income, beginning January 1, 2025. Vermont currently adheres to the federal treatment of subpart F income, exempting 50 percent of GILTI and 37.5 percent of FDII.

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Both bills are non-starters for Gov. Phil Scott (R), who on March 27 devoted his weekly press conference to urging against the proposed changes.

Link: H.721

Tax Policy Corner

Can States Afford Their Recent Tax Cuts? - Jared Walczak, Tax Policy Blog:

Tax revenues remain substantially above pre-pandemic totals, even adjusting for high rates of inflation. And notably, tax revenues have risen more in states that cut taxes than those that haven’t. The 27 states that cut the rate of a major tax (individual income, corporate income, or sales tax) experienced a 9.8 percent tax revenue increase in real terms between calendar years 2019 and 2023, while states that didn’t cut any of these taxes—or, in a few cases, increased them—saw tax revenues grow by 6.2 percent.

Think about what this means. The tax-cutting states grew revenue faster with lower rates.

We shouldn’t take this too far, naively asserting that tax cuts paid for themselves. But we should also acknowledge that states that have prioritized tax competitiveness have done better than their status quo peers.

Tax History Corner

Tax History: Compromising on the Current Tax Payment Act of 1943 - Joseph Thorndike, Tax Notes Tax History Project. The Tax Notes historian discusses a problem that hadn't occurred to me - the problem of moving to income tax withholding when it hadn't been required before:

The law also lacked a crucial administrative provision: collection at the source for individual income taxes. Nor did it move taxpayers to a system of current collection. Since 1913, taxpayers had been running a year behind: Each spring, they filed a return and paid taxes on the previous year’s income. In theory, people saved enough during the course of the year to make good on the eventual tax bill. In practice, some number of improvident taxpayers found themselves short of cash when tax day rolled around...

The move to current collection created a transition problem: Absent any relief provisions, taxpayers would be expected to double up on tax payments.

The solution is one I don't think we'll see the likes of again:

A House-Senate conference committee eventually settled on a compromise: To make taxpayers current, Congress would forgive 75 percent of 1942 or 1943 tax liabilities, whichever was less. To ease future compliance burdens, a new withholding system would take 20 percent from most paychecks, easing the task for inexperienced taxpayers.

I can't imagine the planning in the transition year, especially without modern computers.

State Tax News & Views: SALT Cap Workaround as Revenue Headache

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Joe B. Kristan, CPA