State Conformity to Federal Tax Reform (TCJA)

 

Since the passage of the federal Tax Cuts and Jobs Act (TCJA) in late 2017, state lawmakers have been debating how they should respond to changes in the federal tax code. Most states have chosen to selectively conform to new federal provisions and, in particular, decouple from many of the foreign income changes. States generally do not tax foreign income, due to constitutional limitations and policy rationale, and in the wake of TCJA, the norm has been for states to decouple or provide significant relief from Global Intangible Low-Taxed Income (GILTI) and the Repatriation Transition Tax (RTT).


Global Intangible Low-Taxed Income (GILTI)

TCJA moved business taxes from a “worldwide” system to a “quasi-territorial” system. The new system is closer to the global norm, under which businesses are taxed only on domestic income. In other words, under the TCJA, businesses are taxed principally on the income they earn in the U.S. The new system does include some elements of taxation of foreign income (hence it is quasi-territorial rather than truly territorial), including Global Intangible Low-Taxed Income (GILTI).

As of May 2019, twenty-one states have either decoupled from GILTI or excluded 95 percent of GILTI from the state tax base. In another 14 states, the state has a deduction that may apply to GILTI, or the deduction for GILTI is less than 95 percent. Only six states tax 50 percent or more of GILTI. Recognizing the flaws associated with including GILTI in the tax base, only two of the 18 states which have 10 or more Fortune 500 company headquarters include 5% or more of GILTI in their tax base: New Jersey and New York.  


Interest Expense Limitations

Eight states have decoupled from the federal interest expense limitation provisions (163(j)). The federal provision provides no material benefit to states and would be extremely complex to impose, administer, and comply with at the state level. Thirteen states affirmatively conformed to the limitation on business interest expenses implemented at the federal level.The remaining states either do not have a corporate income tax or have taken no affirmative action on the interest expense limitation in the wake of the TCJA.

Repatriation Transition Tax

Decoupling from the TCJA’s Repatriation Transition Tax (RTT) has been the norm for states. Under the old federal tax system, states generally did not include foreign income in their own tax bases, for both policy reasons and Constitutional limitations. A significant majority of states have decoupled from the one-time tax on repatriated earnings and profits. Twenty-six states decoupled from the RTT (purple states in the map below). Only five states failed to decouple (or provide significant relief) and thus include one-time repatriated foreign earnings and profits in their state tax bases (red states on the map below). 

 

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