2019: The Year of the Tax Reform
As Chinese New Year approaches – an ancient tradition dating back to 1440 BC by some estimates – the world will bid farewell to the Year of the Dog and the last vestiges of 2018. The act of cleaning is central to celebrating the holiday, as it represents preparing for the New Year by casting out clutter and starting with a clean slate. 2018 left many states with cluttered dockets full of unresolved tax issues. As states progress through 2019 legislative sessions, they have a fresh beginning to provide clarity to taxpayers and pass real tax reform.
Congress spurred a dynamic year of state-level tax reform after passing the Tax Cuts and Jobs Act of 2017 (TCJA). When Congress or the U.S. Treasury makes changes to the Internal Revenue Code (IRC), states have the option to conform their state codes to the new IRC. Following the TCJA the federal tax base became broader, resulting from capped deductions and the repealed personal exemption. Many individuals would pay more in taxes if the TCJA stopped there.
However, by cutting personal and corporate income tax rates, doubling the standard deduction and increasing the child tax credit, the TCJA more than offset the effective tax increase due to a broadened base. If states conform to the IRC following the TCJA, their bases would become similarly broadened and the state would collect more in taxes from its residents. Unless states intentionally make the choice to cut their own rates, state taxpayers would see an effective tax increase upon IRC conformity. In fact, due to base broadening many states have a unique opportunity to cut taxes while collecting the same – if not more – revenue than last year.
Fortunately, many states seized the opportunity to cut tax rates through IRC conformity. Idaho cut every personal income tax bracket by 0.475 percentage points, reduced the corporate income tax rate to 6.925 percent, doubled the standard deduction, and created a child tax credit of $205 per dependent. Iowa cut personal and corporate income tax rates for every bracket with the opportunity for further rate reductions contingent on revenue targets. Even notoriously progressive states used IRC conformity to cut taxes. Vermont created a new standard deduction of $6,000 and $12,000 for single and joint filers, respectively, a new personal exemption of $4,150, lowered the personal income tax rate for every bracket and consolidated the top personal income tax brackets. In all, through IRC conformity, state tax cuts will save taxpayers billions.
Of the 41 states with an income tax on wage income, 25 left tax conformity questions unresolved. With another state legislative season beginning soon, the Chinese New Year gives states a clean slate to offer real tax reform. The world welcomes the Year of the Pig in February as the Chinese Lunar Calendar steps into 2019. If states decide to cleanse their tax codes of pre-tax reform clutter and be responsible stewards of taxpayers hard-earned money, 2019 can be both the year of the pig, and the year of tax reform.