Congress finished its overhaul of the tax code right before the new year rolled in, but the year ahead is bound to see some serious wrangling when it comes to states grappling with the law’s effects. As each individual state has its own tax setups, squaring federal and tax tax obligations for citizens could take some time and be more personalized than many experts at first anticipated.
The tax reform bill that the Republicans ushered in to existence might make it more difficult for states to raise their own local taxes. Some politicians from high-tax states like California are howling over the restrictions that President Trump’s tax reform agenda impose on their state’s ability to generate enough revenue to cover social services like education. States are, therefore, on the lookout for any new sources of revenue that can help make up the difference.
Unfortunately, all of the uncertainty coming from Washington with respect to the severity of cuts and the funds that states can expect in the year ahead is going to spill over to the national and local business environment. Investors and small business owners simply don’t know what funds, subsidies, or tax incentives they can expect in 2018, so businesses are being more cagey than they normally would be. States are trying to assure investors by working out their own tax schemes, but uncertainty remains as there are simply too many questions on the federal side of the equation.
Our tax code, as any accountant can attest, is incredibly complicated. Federal and state taxes can often track one another through a process called conformity in which changes at the federal level lead to automate decreases or increases at the state level. Hence, one tax system is being forced into conforming with the other to some degree.
As the new tax reform agenda scraps many itemized deductions, more of an individual tax filler’s income could be subject to taxation. That taxation, though, is anticipated to be broader and shallower. This has been a plank of Republican tax reform agenda for decades, and it appears the Republicans in both Houses have finally managed to turn the dream into a reality.
The truth of the matter is that many states are going to be increasing their revenues because of these tax changes, but states with bloated liabilities might be forced to make do with less or find more creative funding sources.