State Tax News & Views: California NOL suspensions, SALT cap workaround questions, and much more.

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We begin our bi-weekly summer schedule for State Tax News & Views. Our next state post will appear June 14.

AICPA makes recommendations to IRS on next Priority Guidance Plan - Martha Waggoner, The Tax Adviser:

"As the IRS plans to prioritize providing additional guidance as stated in strategic initiative 1.7 in the IRS Inflation Reduction Act (IRA) Strategic Operating Plan, we encourage the IRS to issue guidance on the areas that we have suggested," says a letter to the IRS, dated May 17 and signed by Blake Vickers, CPA, CGMA, chair of the AICPA Tax Executive Committee (TEC).

An important item noted in the AICPA letter is the need for more guidance on the tax treatment of payments and - especially - refunds - of "pass-through entity taxes" (PTETs) enacted to work around the $10,000 cap on itemized deductions for state and local taxes. Many taxpayers are blissfully unaware that deductions by partnerships or S corporations at the entity level might lead to taxable personal refunds.

The AICPA letter addresses important issues regarding the timing of deductions at the entity level and the nature of deductions and refunds in computing income taking into account passive loss rules, Section 199, and limits on business interest.

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

With state tax revenues receding from all-time highs, there’s been a great deal of handwringing about whether states can afford the tax cuts adopted over the past few years. Curiously, there’s been no similar interrogation of whether states can afford the monumental spending increases adopted in that timeframe. Still, the question deserves to be answered: with 27 states reducing the rate of a major tax between 2021 and 2023, is there cause for concern?

Fortunately, this question can be addressed empirically, and the data strongly suggest that the answer is no.

State Tax and Economic Review, 2023 Quarter 4 - Lucy Dadayan, Tax Policy Center:

Total state government tax revenue collections rose by 4.5 percent in nominal terms and 1.8 percent in real terms in the fourth quarter of 2023 relative to a year earlier. Personal income tax revenues increased by 5.9 percent and corporate income tax revenues increased by 6.7 percent in real terms in the fourth quarter of 2023 compared relative to a year earlier. However, this national growth was primarily driven by California, where income tax revenues surged largely due to the extension of the income tax filing deadline from April 2023 to November 2023. Inflation-adjusted sales tax collections decreased 1.3 percent while motor fuel tax collections increased 3.9 percent in the fourth quarter of 2023 relative to a year earlier.

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The fiscal outlook for state and local governments remains uncertain, with potential risks stemming from economic fluctuations and policy changes. If revenue collections deteriorate further, state policymakers will need to take additional steps to ensure stable and sustainable revenue streams for the upcoming fiscal year and beyond.

Locals Exert Pressure on Taxpayers: Compliant No More - Tram le and Connie Zoerink, Tax Notes ($). "As such, local-level taxes are generally overlooked — either unintentionally or intentionally — by taxpayers. In some cases, business taxpayers without the resources to deal with local sales and use tax may choose to ignore local tax duties because the cost to comply may exceed the amount of local tax due. However, business taxpayers that avoid the burden of local tax compliance should reevaluate the risk as local tax enforcement ramps up."

State-By-State Roundup

California

California Lawmakers Agree to NOL Suspensions, New Apportionment Language - Paul Jones, Tax Notes ($):

The Assembly summary of the legislative leaders’ budget deal says the package of legislation includes a modified version of Democratic Gov. Gavin Newsom’s proposal to suspend the use of net operating loss deductions by businesses with over $1 million in annual income and cap businesses’ use of various tax credits at $5 million.

It also includes a proposal by Newsom to adopt language asserting that, for purposes of apportionment, a corporate taxpayer’s income that is excluded from its taxable business income must be excluded from its apportionment factor formula. The proposal is a reaction to the Office of Tax Appeals’ recently released decision in Appeal of Microsoft Corp., which resulted in a large refund for the company.

California NOL Deduction Limit Would Cause Startups to Suffer - Mike Semes, BakerHostetler via Bloomberg ($).

Newsom (D) estimates the proposal would generate about $16 billion in fiscal years 2024-2025 through 2027-2028. But to every taxpayer who has unused NOLs or tax credits, this might seem like the state is strong-arming them into lending about $16 billion without any interest for up to three years.

That’s because the proposal forces taxpayers with NOLs or tax credits to defer the use of those tax assets and pay $16 billion in the aggregate tax now instead of over the next three years. Denying a startup use of NOLs discourages companies from choosing to start their businesses in California.

California SALT Cap Workaround Extension Wins Senate Vote - Laura Mahoney, Bloomberg ($):

The bill (S.B. 1192) from Sen. Anthony Portantino (D) would extend the SALT cap workaround two years beyond the current expiration date at the end of 2025, when the 2017 federal law that created the $10,000 limit is also set to expire. It passed 37-0 and now moves to the Assembly.

The article notes a second bill relating to the SALT workaround passed the California Senate in April. That bill would allow businesses to elect into the pass-through tax regime without

Colorado

Colorado Governor Approves Expanded Historic Preservation Credit - Emily Hollingsworth, Tax Notes ($):

H.B. 24-1314 amends the state’s income tax credit for expenses accrued in the rehabilitation and preservation of residential and commercial historic structures, including extending the program from January 1, 2030, to January 1, 2037.

The measure increases the allowable credit amount per qualified residential structure from $50,000 to $100,000, beginning on or after January 1, 2025. It also reduces the age of historic properties to qualify for the credit from at least 50 years old to at least 30 years old.

Colorado Extends Expanded Film Tax Credit Program Through 2029 - Angélica Serrano-Román, Bloomberg ($). "The new law (HB 1358) allows the state’s Office of Economic Development and International Trade to issue film tax credits until 2029, and raises the credit amount from 20% to 22% of qualified expenditures. The program had been set to expire this year."

Colorado Governor Signs Bills on Easement Tax Credit, Sports Betting - Emily Hollingsworth, Tax Notes ($):

Legislation recently signed into law in Colorado amends the conservation easement tax credit program to reduce the value of the credit but increase the annual cap and the total refund amount that can be claimed.

S.B. 24-126, signed by Gov. Jared Polis (D) on May 20, also requires applications for the credit to be prioritized in the order that they are received and repeals a provision that limited the amount of tax credits that can be reserved for the following year.

Illinois

Illinois Corporate, Betting Company Tax Changes Go to Governor - Michael Bologna, Bloomberg ($):

The revenue plan, HB 4951, passed the House 60-47 early Wednesday. Democrats, who control the chamber with a 78-seat supermajority, had to scramble several times to gather the minimum 60 votes needed to pass the bill just after 4:30 a.m. local time. Earlier in the day the House approved the $53.1 billion appropriations bill, SB 251, by a vote of 65-45. The Senate had passed the revenue bill 37-22 on Sunday, along with the appropriations measure, which it passed 38-21.

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The largest chunk of new revenue, $526 million, would come from a $500,000 cap on the deduction businesses can claim for net operating losses, effective through 2027. The loss deduction is currently capped at $100,000, a limit that expires at the end of 2024.

lllinois to Extend Research Credits, Support Quantum Computing - Michael Bologna, Bloomberg ($). "The House approved HB 5005, which would amend several tax programs including the state’s research credit, and create a special program supporting a quantum computing research campus in the state. The bill passed the House 90-19 after passing the Senate Sunday by a vote of 51-5. Pritzker, a second-term Democrat, in the past has expressed support for the measure, which previously was in a different shell bill, HB 817."

Iowa

Disaster Emergency Tax Penalty Relief - Iowa Department of Revenue. "Due to recent storms, Governor Reynolds authorized a Proclamation of Disaster Emergency in response to severe weather that occurred and declared several counties in Iowa to be disaster areas. For taxpayers who may have missed deadlines to file or pay Iowa taxes because records were destroyed by those storms, tax penalty relief is available."

Kansas

Gov. Laura Kelly calls special session of Kansas Legislature to contend with tax-cut bill - Tim Carpenter and Rachel Mipro, Kansas Reflector:

Gov. Laura Kelly said Wednesday she would issue the order calling the Kansas Legislature to a high-stakes, election-year special session June 18 to work on reducing property, sales and income tax burdens without propelling the state toward financial problems down the road.

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Kelly, the second-term Democrat, proposed several tax plans to the Republican-led Legislature during the regular 2024 session and she vetoed three bills passed by the Legislature that would have shed more than $500 million annually in state revenue. A shifting coalition of GOP and Democratic legislators expressed interest in slashing taxes, while the governor held to the view Kansas should be careful not to invite budget problems reminiscent of what transpired after Gov. Sam Brownback signed a 2012 bill aggressively lowering the state income tax.

Minnesota

Huge Minnesota Tax Bill Approved With Few Original Provisions - Emily Hollingsworth, Tax Notes ($):

H.F. 5247, approved on May 24, makes changes to the timing and amount of the Minnesota child tax credit and amends statutes related to the state’s minerals taxes and tax-forfeited property. But controversial proposals to require the public disclosure of state corporate franchise tax returns and to study the erosion of the corporate tax base and options for addressing it were dropped from the bill before lawmakers approved it May 19.

Other tax provisions that were in prior versions of H.F. 5247, including one decoupling the state from a federal provision on employment tax relief, failed to advance in the last days of the legislative session, as lawmakers struggled to agree on the bill's provisions and as filibustering among Republican lawmakers further stymied negotiations, Senate Taxes Committee Chair Ann H. Rest (DFL) told Tax Notes May 28.

Missouri

Mo. Panel Affirms Nixes Of St. Louis Teleworker Tax, Class Bid - Paul Williams, Law360 Tax Authority ($):

St. Louis must issue earnings tax refunds to six nonresidents for days they worked outside the city after the COVID-19 pandemic began, but those employees can't seek a class action on behalf of other remote workers, the Missouri Court of Appeals ruled Tuesday.

A three-judge panel affirmed a circuit court's holding that St. Louis' earnings tax ordinance doesn't permit the city to assess the 1% tax against nonresidents for work performed in other jurisdictions. The law allows the city to apply to tax "for work done or services performed or rendered in the city," and the appeals court said St. Louis was attempting to rewrite the ordinance to tax work or services "performed or rendered into the city" via telecommuting.

New York

New York Bill Would Criminalize 'Zapper' Sales Tax Fraud - Emily Hollingsworth, Tax Notes ($):

A bill approved by the New York State Senate is the latest in lawmakers' yearslong effort to make the use of sales tax suppression software a criminal offense.

S. 2266 would create a new criminal offense: defrauding of the government in the first degree. The offense is defined as knowingly manufacturing, installing, or using automated sales suppression devices “for the purpose of enabling or assisting any person to evade any tax” owed to the state or a political subdivision, according to the bill. It would be a Class D felony.

I'm pretty sure sales tax evasion is already a crime, but this would add an additional sanction for using software that hides sales.

Washington

Washington Capital Gains Tax Revenue Falls in Second Year - Paul Jones, Tax Notes ($):

Washington’s capital gains tax has generated $433 million in its second year, well below collections in its first year.

The reason for the revenue drop isn’t immediately clear, but both proponents and opponents note that the tax — which is on high earners’ capital gains and goes to education and early-learning programs — is inherently less stable than the state's other levies. The tax generated almost $800 million in its first year.

Jeff Bezos moved to Florida in 2023. It's not clear how much Washington gains tax he avoided by making the move in 2023, but this article says that he may have avoided $430 million in 2024 state taxes by February 15 - more than enough to have made up the 2023 Washington revenue decline.

Tax Policy Corner

Tax Breaks for Data Centers Are Exactly Wrong - Andrew Leahey, Bloomberg:

Tax breaks for data centers aim to attract jobs to areas of the country with high unemployment. Despite their evident shortcomings, they remain a popular choice for state legislatures—and it seems like a data center tax break arms race is under way. But states should tax data centers more to offset the strain they place on local infrastructure.

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Evidence that data centers drive job creation simply isn’t there. The data we do have, while several years old, indicates they create few jobs and cost about $2 million for each they do manage to conjure up.

Eliminate the Property Tax? LOL - Ronald Fisher, Michigan State University via Tax Notes. "Property taxes are relatively visible and thus contribute to government accountability. Property tax revenues have been responsive to economic growth and perhaps the most stable of all tax bases. Property taxes often are economically efficient compared to alternatives, especially if they serve as local benefit charges. Finally, property taxes may add to overall tax progressivity compared to the alternatives; importantly, property taxes are in most instances more progressive than sales taxes.

I Want to Be in Pictures - David Brunori, Law360 Tax Authority ($). "Film tax credits do not create permanent jobs. They do not create permanent investment. They merely cost states money. Every study not commissioned by the film industry shows that."

Tax History Corner

Efforts to get rid of property taxes go up against 5,000 years of history:

Egypt was arguably the first to create direct taxes on property around 3000 BC to build grain warehouses, the pyramids and pay soldiers. Because there was no coined money at this time, the taxes were collected in the form of harvest yields, other property, or labor.

These taxes were paid at least once a year, and supervisors known as Viziers acted on behalf of the Pharaoh to collect and record the payments. During famine and other hardships, the stored grain was used to feed public workers and the poor.

I wonder how they assessed the pyramids.

State Tax News & Views: California NOL suspensions, SALT cap workaround questions, and much more.

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Joe B. Kristan, CPA