Companies should start considering how to address not only what Congress may do, but what states may do in response when it comes to tax reform.
Jon Traub, managing principal, tax policy group, Deloitte Tax LLP shared, “The President’s speech last week made clear the urgent need for long overdue reform of our tax code. While key details remain to be filled in by the House and Senate, this hopefully marks the beginning of a sustained effort to develop broad public support for tax reform.”
Though GOP congressional leaders and the White House have yet to reach an agreement on the details of the tax plan, companies should begin paying close attention to how their states plan to conform to any tax reform package.
FEI Daily spoke with Valerie Dickerson, leader for Deloitte’s WNT Multistate Services Tax practice, on the questions corporate C-suite and financial executives should be asking, including to what degree states will ultimately conform to any tax reform enacted by Congress.
FEI Daily: Where are we on tax reform and can you share any predictions?
Valerie Dickerson: True tax reform will be difficult, and while I’m still optimistic that the administration and congressional members will succeed, the odds are not as good as they were earlier this year. The hard work will resume in September as the tax-writing committees attempt to address the myriad complexities presented by reform. In this uncertain legislative environment, companies can use the time to model the proposals against one another and scenario plan about the effects of the various tax reform proposals on the table. It’s important to note that of all of the issues out there, Congressional Republicans and the President are united on this one and it will be the focus of a major legislative push in the coming months.
FEI Daily: Can you share some of the different directions tax reform could take as it trickles down to the states?
Dickerson: One of those things that I predict is that the complexity around the compliance may increase. That’s because the states are going to have to evaluate budgets and decide what they can really afford to conform to, in any tax reform package. Depending on the makeup of the state’s local economy, there may be some pieces that are more appetizing than others.
We saw a mass decoupling when federal bonus depreciation was enacted. I would suspect that states are going to have to consider whether they can afford full expensing if that proposal were to be adopted. States that decoupled from bonus depreciation might give us some indication as to what states might do about full expensing. If the federal government were collecting less money that conceivably means less money that is passed along to the states. That may add to state budgetary pressure.
Other states may, in this search for a less volatile tax base, take another look at gross receipts taxes the way Washington has with the B&O tax, the way Ohio has with the CAT tax, and Texas with the margins tax. State legislatures are going to have to look at a budget, decide what parts of the policy they find appetizing and which they could afford to conform to. We may see frozen conformity for even a year or two while states figure that out.
FEI Daily: How can businesses prepare for these changes?
Dickerson: A couple of ways. One, I would say being able to respond and gather and comply on the state tax bases is important. There may be less opportunity to do the same as last year or automatic federal roll overs, so if any company is already considering implementing new ERP software, that might be the time to think about whether they want to tax-sensitize the data collection so that they have the requisite information they need down to the state level in order to comply.
Another thing to consider is whether there’s any planning that needs to take place to mitigate the impact of this. If there is a federal rate decrease to 25, 20, whatever it is, the state tax rate and burden overall becomes a greater component via the lost tax burden and so some of those state liabilities may come more to the forefront.
FEI Daily: How can companies prepare for a repatriation?
Dickerson: I do think there is an opportunity here for companies. One aspect of federal tax reform is a deemed repatriation or a tax on a deemed dividend from overseas. If deemed repatriation were enacted, even if it doesn’t result in actual cash repatriation immediately, it may free up those funds to come back to U.S. at some point. That might give tech companies time to decide whether and where in the U.S. they might want to invest.
The states remain competitive with one another about negotiating incentive packages to attract businesses to make capital investments, and to make hires in their states. If there’s any thought of reinvesting funds or making hires somewhere in the U.S., negotiating those before announcements are made, before the ground is broken, is really key in having the tax practitioners at the table for those discussions. It’s not just about the negotiation of credit or incentive, it’s also about the ability to sustain it, essentially correctly claiming it and making it audit proof so if the department of revenue has an audit the company can still sustain it and retain the ability to monetize it.•