The now-called Trump tax reforms are a reality. Tax experts everywhere are now debating the good-and-bad of the reforms and their impact on business, individuals and — in this case — states.
This story looks at how two very different states are viewing the Trump tax reforms and their impact on state budgets and — in Oregon’s case — with residents as well.
What is becoming controversial is the windfall most states are expecting from the reforms. Half of the states automatically adopt much of the federal tax code. The other half does not and changes require legislative action.
No matter how the tax reforms are adopted, eventually items like IRS definitions, deductions and tax credits for children and mortgages are coordinated between the federal government and the states.
Tax rates are set separately.
Experts say new law has changed many deductions and lowered others so states are likely to see millions in new revenue. Also impacting states is the limit of how much in local and state taxes can be deducted by a taxpayer. That will result in a windfall of money.
The controversy now — in many states — is whether or not to send that windfall back to the taxpayer in the form of refunds or to keep the money to use for budget balancing or new projects.
In 1986 — the last major overhaul — most states cut taxes.
In Montana, the battle over whether the Trump tax cuts will be beneficial has begun and former PIA Montana and PIA National President, and now Montana Senate Majority Leader Fred Thomas is in the middle of the fight.
Montana Revenue Director Mike Kadas said the federal cuts will put the state — which is already struggling to balance the budget — in a $29 million hole. His contention is that as a rolling conformity state, the 20% deduction for pass-through businesses will be a huge hit for state income.
Pass through businesses — of which many independent insurance agents are — consist of sole proprietorships, limited liability companies, partnerships and small corporations taxed as partnerships.
They do not pay a corporate tax but instead report business income as personal income. In Montana, there are 381,170 tax returns posted as pass-through businesses. Income ranges from almost nothing to thousands of dollars. Federal tax law now says 20% of that income is exempt from taxing.
The income loss from that 20% — Kodas said — will amount to $29 million.
At this point — and in order to better understand the Montana controversy — a definition is in order for how states work with federal tax law. There are two types of conformity:
• Conformity on a rolling basis means a state automatically adopts provisions of the IRC as they are enacted. Montana does this and so does the PIA Western Alliance state Nevada.
• 25 states and Washington D.C. use that method.
• Fixed-date conformity or static-conformity is when the state Legislature sets a date to adopt the federal provisions.
• 21 states — including several PIA Western Alliance states — use this method.
Kadas wants a special session of the Montana Legislature to deal with the shortfall. Thomas and the Republicans have produced a report of their own — 15 pages in all — from the legislative staff attorney Jaret Coles pointing out the error of Kadas’ opinion.
The report notes that Montana can — and has in the past — break with federal tax rules. Thomas thinks the best solution to the debate is for the Legislature’s interim revenue committee to look at the figures and then determine if there’s a problem.
If the conflict continues, they can then go to Montana Attorney General Tim Fox for a ruling. “The attorney general has to always use his power cautiously and carefully. My thought is, we take this [Jeret Coles] opinion to the Interim Revenue Committee, present it and have them say, ‘OK, we’re going to adopt Mr. Cole's letters and positions. So, then you kind of have an official position of the revenue side of the Legislature,” Thomas said.
Republicans are suggesting this being politicized by Democrat Gov. Steve Bullock, Kodas and his executive branch. They point to a review by the Tax Foundation that analyzed the impact of the pass-through decision on states and said the new law protects states like Montana.
In Oregon, the Legislative Revenue Office is painting a pro and con view of the reforms.
The big plus — Legislative Revenue Office spokesman Chris Allanach says — is the reforms will save Oregonians $1.5 billion a year. While it varies from person to person that averages out to about $840 per individual. About 70% of Oregonians will be happy with the changes and get a federal tax cut. Federal taxes will go up for about 10% of Oregonians and state taxes will rise for about 40%.
Allanach says the big winners will be those who can reclassify income as pass-through income from a business.
The state doesn’t fare so well in the beginning but does better toward the end of the reforms. The Legislative Revenue Office expects the state to take a $100 million hit early on but will see a windfall of $203 million a year by 2024.
Jeff Dixson is the founder and chief executive of NW Financial & Tax Solutions. He said no one really knows how this will all turn out until the numbers are run and the returns filed at the end of 2018. “You really don't know how this is going to impact you until you run your tax return. From what we've seen so far, it really is going to benefit more people in a positive way.”
He sees an additional $150 million in revenue to the state this year because of the changes and how they trickle down to Oregon. Allanach disagrees and says businesses will take advantage of benefits and deductions that will produce a $76 billion loss in revenue for the state this year and a $77 million a year loss in years to follow.
Another focus in Oregon is the $10,000 cap on state and local tax deductions. As noted earlier, some taxpayers will save less in Oregon than in other states. And it is said that many of the wealthier people in the state will pay higher and not lower federal taxes because of the inability to write off the state tax.
The PIA Western Alliance state’s of California, Arizona, Idaho, Montana and New Mexico have people facing the same dilemma.
Here’s how the individual PIA Western Alliance states work with the federal government on taxes and tax reform:
• Alaska — No individual income tax — no need to do anything
• Arizona — Static conformity — the Legislature has to set a date to adopt
• California — Static conformity — the Legislature has to set a date to adopt
• Idaho — Static conformity — the Legislature has to set a date to adopt
• Montana — Rolling conformity — changes are automatically adopted
• Nevada — No individual income tax — no need to do anything
• New Mexico — Rolling conformity — changes are automatically adopted
• Oregon — Static conformity — the Legislature has to set a date to adopt
• Washington — No individual income tax — no need to do anything
Source links: The Hill, Billings Gazette, Tax Analysts, OregonLive.com