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States with rolling conformity automatically implement federal tax changes as they are enacted, unless the state specifically decouples from a provision. This autopilot approach tends to provide the greatest clarity and predictability for taxpayers, though at a modest cost of state control.
Some such states conform legislatively every year and are functionally identical to states with rolling conformity, albeit with a measure of added uncertainty. Others are inconsistent, and may even conform to an outdated version of the IRC for many years. Finally, a handful of states only conform selectively, incorporating certain federal provisions or definitions by reference, but omitting large swaths of the federal tax code and forgoing the use of federal definitions of income as their own starting points for calculation.
No state, of course, conforms to every provision of the Internal Revenue Code. Each state offers its own set of modifications, additions, and subtractions to the code. Each adopts its own set of rules and definitions, frequently layered atop those flowing through from the federal code. But from definitions of income to exemptions to net operating losses, and even what filing statuses are available and whether a taxpayer can itemize their deductions, the federal tax code consistently informs state-level taxation.
In the course of about two hundred pages, the tax reform bill fundamentally remade significant aspects of the tax code and substantively modified many others. Among those which will impact states are:. In aggregate, the base-broadening provisions are worth considerably more than the base-narrowing ones, particularly within the individual income tax code. Each provision changed at the federal level has varying impacts on states, though, and each will be considered in turn.
As state legislators grapple with what these provisions mean for their state, it is vital that state fiscal offices provide estimates of the effects of each relevant provision. State and local individual income taxes account for At the federal level, individuals will receive the benefit of a higher standard deduction, rate cuts along with broader bracket widths , a more generous child tax credit, and a higher alternative minimum tax AMT exemption threshold.
The vast majority of filers will receive a tax cut at the federal level,  but because base-broadening measures flow through to many states, while rate reductions do not, they could easily see a state tax increase unless states act to prevent one. An increase in the standard deduction and the repeal of the personal exemption are easily the most consequential changes for many states, and eliminating the personal exemption broadens the tax base considerably more than raising the standard deduction narrows it.
The other changes, although not insubstantial, do not change the fact that for most states, the tax base would be broader after federal tax reform, forcing states to decide whether to keep the additional revenue to grow government, cut rates to avoid an automatic tax increase, or use the broader base to help pay down broader tax reform. Although each has its own additions and subtractions, twenty-nine states and the District of Columbia use federal adjusted gross income AGI as their starting point for calculating individual income tax liability.
Figure 1 illustrates how this concept plays out from the perspective of taxpayers on their individual income tax returns. In states which conform to federal AGI, taxpayers carry line 37 from their federal return to their state return. In states which use federal taxable income, taxpayers start by copying line 43, which, as Figure 1 illustrates, includes additional deductions and exemptions, and thus carries with it more provisions from the federal system.
Electing federal taxable income as a starting point for state income taxes has the effect of incorporating federal standard and itemized deductions, the personal exemption, and a new deduction for qualified pass-through business income, unless the state expressly decouples from these provisions. Eighteen states and the District of Columbia have rolling conformity, nineteen have static conformity, and four only conform selectively without universal reference to a specific version of the IRC.
Two states with their own state-defined income starting points nevertheless conform to the IRC: Alabama on a rolling basis and Massachusetts to a fixed year. Most, but not all, static conformity states adopt conforming legislation every year as a matter of course, albeit sometimes retroactively.
Massachusetts, however, conforms to the federal tax code as it existed in , and California, Iowa, Kentucky, and Oregon have only brought their federal conformity up to Figure 2 shows how frequently states update their conformity to federal definitions.
Even when static conformity states routinely incorporate updated versions of the federal tax code, the process introduces some measure of uncertainty, and with the recent tax overhaul at the federal level, some states may weigh their options before adopting new IRC conformity legislation. It will, however, be in the best interest of most states to do so, since tax reform broadens the individual income tax base overall.
These provisions result in the most profound revenue changes in many states. If a state instead uses federal adjusted gross income as its starting point, then it begins its calculation without the inclusion of these deductions or exemptions. Figure 3 shows how states incorporate the federal standard deduction and personal exemption into their own tax codes. Eliminating the personal exemption broadens the tax base considerably more than raising the standard deduction narrows it.
At the federal level, those changes are paired with a far larger child tax credit, but that provision only flows through to three states, and then only in part. The seven states Colorado, Idaho, Minnesota, New Mexico, North Dakota, South Carolina, and Vermont that conform on both the standard deduction and personal exemption will experience base broadening, as the standard deduction roughly doubles but the personal exemption is repealed. Missouri, which conforms to the standard deduction but only partially to the personal exemption,  could see a revenue loss, while Maine, which conforms to the personal exemption and not the standard deduction, could experience a larger revenue gain.
Utah offers credits worth 6 percent of the value of federal deductions and exemptions, and will see a revenue increase due to this proportionality. Another twelve states offer their own state-defined standard deductions and personal exemptions, but multiply their state-defined personal exemption by the number of exemptions claimed at the federal level.
In one of those twelve states, Nebraska, the standard deduction takes the form of the lesser of a state-defined standard deduction or the federal standard deduction. Whereas the federal standard deduction has been the lower of the two since this provision was adopted in ,  the state-defined deduction is now the lower due to the expanded standard deduction under federal tax reform.
With the exception of Missouri and Nebraska, all states either 1 conform to both the standard deduction and the personal exemption, yielding a broader tax base; 2 conform, in whole or in part, only to the personal exemption, yielding an even broader tax base; or 3 forgo or use both state-defined standard deductions and personal exemptions, leaving the tax base unchanged.
Many states incorporate federal tax deductions into their own codes, some of which have been modified or even repealed under the new tax law. Changes to both above-the-line and itemized deductions can have an impact on state revenues. Above-the-line deductions are those which reduce adjusted gross income.
These are the adjustments made prior to line 37 in Figure 1. They can be claimed by all filers, regardless of whether they choose to itemize or take the standard deduction.
At the federal level, examples of above-the-line deductions have included contributions to Individual Retirement Accounts IRAs , interest on student loans, higher education expenses, health savings account contributions, moving expenses, and alimony payments, among other deductions. Below-the-line deductions, by contrast, come after adjusted gross income.
They have included the standard deduction and the personal exemption, considered previously, but also itemized deductions, which can only be claimed by filers who do not take the standard deduction. Common itemized deductions include those for state and local taxes, home mortgage interest, medical expenses, and charitable contributions.
The new law repeals the above-the-line deduction for moving expenses except for active duty military personnel , but also temporarily lowers the eligibility threshold for taking the medical expense deduction.
Additionally, deductions for home equity indebtedness are no longer allowed. This is because many states allow a portion of the deduction typically that associated with local property taxes to be claimed, and limit the total size of the state deduction based upon the amount claimed on federal tax returns.
States which begin their calculations with federal taxable income incorporate itemized deductions by default, unless they specifically add back the value of a specific deduction. However, states which begin with adjusted gross income frequently offer these itemized deductions as well. If, in doing so, they tie them to the federal tax code rather than creating them as stand-alone provisions of their own codes, then the new federal changes will affect them as well.
Save for the medical expense deduction, which is now available to a larger number of filers, all these changes are base-broadeners, and will increase revenues for states which conform to these provisions. The credit is also available to a much wider range of taxpayers, since income phaseout thresholds rose dramatically. Most states, however, do not offer such credits and would not automatically conform to the provision, meaning that they gain in many cases from the repeal of the personal exemption without any obligation associated with the expanded child tax credit.
However, three states—Colorado, New York, and Oklahoma  —offer child tax credits linked to a percentage of the federal credit for instance, Colorado offers a credit in the amount of 30 percent of the value of the federal credit. The expanded credit would represent a cost to these states if they do not decouple or reduce the percentage at which they match the federal provision.
Thirty-three states offer deductions for contributions to education savings accounts, which may see increased use now that they can be utilized for primary and secondary, as well as higher, education.
However, in some states the enabling legislation specifies use for higher education, which may result in a disallowance of state tax benefits to the extent that the accounts are used for primary and secondary education. Federal tax reform will also affect state taxes in more subtle ways, even where state tax codes are unaffected. Before tax reform, about 30 percent of filers itemized. Most now expect fewer than 10 percent of filers to do so under the new law.
In some cases, there will be filers who would have been better off taking the standard deduction at the state level but who are forced to itemize because doing so is disproportionately beneficial to them at the federal level, and they are required to follow their federal filing choice on their state return.
If these filers now elect to take advantage of the higher federal standard deduction, they would be in a position to use a more personally advantageous choice at the state level, reducing state revenues. With federal tax reform, small businesses will see an expansion of the Section small business expensing provision, which allows certain investments in machinery and equipment to be fully expensed in the year of purchase. This provision will flow through to the states which conform with federal tax treatment.
Thirty-six states adopt federal Section expensing allowances and investment limits, while seven states offer small business expensing regimes with their own expensing limits.
Section applies to businesses on the basis of size, not entity formation, and is thus available to small C corporations as well as pass-through businesses. Because of its phaseout levels, however, it is overwhelmingly utilized by pass-through businesses against individual income tax liability.
The full expensing provisions of the new federal law, discussed later, should render Section expensing almost exclusive to pass-through businesses, hence its inclusion in the individual income tax section of this paper.
However, because it is not legally limited to such entities, the deduction is available in states which forgo individual but not corporate income taxes. A new federal provision, the deduction for qualified pass-through business income, will affect a small number of states if they do not decouple proactively. For those above that threshold, the deduction is limited to the greater of a 50 percent of wage income or b 25 percent of wage income plus 2. Above the threshold, moreover, many professional services firms are excluded.
Crucially, it is structured as a deduction against taxable income, not adjusted gross income. As such, it would be incorporated into the tax codes of Colorado, Idaho, Minnesota, North Dakota, Oregon,  and South Carolina, which use federal taxable income as the starting point in determining state tax liability. Of these, only Colorado and North Dakota conform on a rolling basis; in the other four states, this provision would be picked up only when conformity statutes are updated.
If states do not wish to offer the pass-through deduction, they could disallow the deduction expressly by adding back the amount of the deduction into state taxable income, or indirectly by adopting federal AGI as their income starting point. Of states which conform to federal AGI or use their own state-defined definition of income, only Montana has the potential to incorporate the pass-through deduction. That section in turn incorporates a wide swath of code which now includes the new pass-through income deduction.
The Montana Department of Revenue has concluded that this makes the deduction available in the state, although an independent legislative analysis suggests that the deduction could be disallowed, noting that the state does not fully incorporate every provision that is added to that expansive stretch of federal code.
Federal tax reform ushered in a major overhaul of corporate taxation. The new tax law brings the corporate income tax rate in line with the rest of the developed world, overhauls the international taxation regime, changes the tax treatment of capital investment, and modifies or eliminates several targeted tax preferences.
The law modernizes the U. Under a worldwide system, all income, no matter where earned, is subject to domestic taxation, but with credits for taxes paid to other countries. Under a territorial system, a company is only taxed on domestic economic activity. It also allows the full expensing of short-lived capital assets—essentially, investment in machinery and equipment—for five years, after which the provision phases out. The corporate income tax is imposed on net income after expenses , but traditionally, investment costs must be amortized over many years, following asset depreciation schedules.
This creates a bias against investment, and this disparate treatment has long been in the crosshairs of reformers. The new law does not eliminate depreciation schedules altogether, but allows purchases of machinery and equipment to be expensed immediately. At 21 percent, the new corporate income tax rate is now in line with averages for developed nations, while certain deductions, most notably the Section domestic production activities deduction, have been modified or as in the case of Section repealed.
Net operating losses NOLs may now be carried forward indefinitely, but carrybacks are disallowed and the amount of losses that can be taken is capped at 80 percent of tax liability in a given year.
While corporate income taxes generally constitute a modest share of state revenue, limiting the impact these changes will have on state coffers, they nonetheless flow through to states in ways worth exploring.
Forty-five states and the District of Columbia impose corporate income taxes. Of these, sixteen begin their calculations with federal taxable income, while twenty-two adopt federal taxable income before net operating losses and special deductions as their starting point. Both options represent lines on the federal corporate income tax return. Louisiana and the District of Columbia begin with federal gross receipts and sales before making a range of adjustments to approach a net figure, while Arkansas and Mississippi implement state-specific calculations.
Four states Nevada, Ohio, Texas, and Washington use gross receipts taxes in lieu of corporate income taxes, while South Dakota and Wyoming forgo both corporate income and gross receipts taxes. Twenty-two states and the District of Columbia adopt rolling conformity, implementing changes to the Internal Revenue Code as they are made.
Twenty-one states use static conformity, and they are more likely to be a couple of years behind on corporate than individual income tax conformity. Arkansas and Mississippi use their own definitions and therefore do not conform. New Jersey also fails to conform, but stipulates that state taxable income is equivalent to federal taxable income before net operations losses and special deductions.
State tax codes and revenues are influenced by a range of corporate tax changes, including the loss or reform of certain business deductions, modification of the treatment of net operating losses, and the full expensing of machinery and equipment.
Corporate income taxes are intended to fall on net income, but business cycles do not fit neatly into tax years. Absent net operating loss provisions, a corporation which posted a profit in years one and three but took significant losses in year two would not be taxed on its net income over those three years, but rather on the profits of years one and three, without regard to the losses in year two.
To address this problem, the federal tax code permits net operating losses to be carried into other tax years. Under prior law, they could be carried forward up to twenty years and backward up to two years. The new tax law eliminates NOL carrybacks but allows indefinite carryforwards. Few states conform fully to federal net operating loss provisions. Fifteen states use a net taxable income starting point, which includes net operating losses.
Many of these, however, require that NOLs be added back to taxable income, even if they subsequently offer their own NOL deduction. Separately, many states which use a starting point prior to the NOL deduction subsequently provide their own subtraction from income, representing a state NOL deduction. Whether states begin their corporate income tax calculations before or after the NOL deduction says less about whether they offer a deduction than about how that deduction conforms to federal provisions.
A few states conform on years a loss can be carried forward, but disallow carryback losses. Since federal law no longer allows carrybacks, a state is listed as conforming on how long NOLs can be carried so long as it conforms with carryforward provisions, even if statutes require an add-back for carrybacks. Federal law now allows purchases of short-lived capital assets machinery and equipment to be expensed immediately, rather than depreciated over many years. This replaces the prior bonus depreciation regime, which offered accelerated but not immediate depreciation, and the fifteen states which conformed to that cost recovery provision will also conform to the full expensing of machinery and equipment.
Although full expensing reduces state revenue, it is also highly pro-growth, and states would do well to conform to this provision. Accepting this cost should be made easier by the fact that most states can expect a broader overall tax base due to federal tax reform. Within this context, it makes sense to incorporate provisions which drive economic expansion. Also read about state moves to implement 5G, tough new digital privacy laws, changes in the criminal justice system and a celebration of legislative staff.
Many parents who owe child support miss payments and accrue some amount of debt or arrearage. States have the authority to charge interest on unpaid support at the rate set by state statute. The interest is generally determined in the same way as other civil judgments. States may look at interest on child support arrears as both an incentive to encourage timely payments as well as a penalty for those who do not make payments.
At least 35 states authorize interest charges for child support arrears. Many charge interest at set rates per year, the most common being. A missed payment becomes a judgment by operation of law. Rates are determined annually by CFO. Interest charges are assessed by the clerk of the court in the county that issued the order or otherwise maintains the official payment record.
Only if reduced to or included in judgment. Although the state does not charge interest, it is authorized by statute at one-year United States treasury bill rate plus 6 percent. From July 1, ,. In certain circumstances, an obligor may be exempt or eligible to apply for a waiver for accrued interest. Obligee must compute and file computation with the circuit clerk to make interest collectible. In the absence of an express contract, interest rate is equal to the prime rate at the largest bank in Nevada on Jan.
For and , interest rate is 6. IV-D program will calculate interest on arrears accrued after July 1, ; otherwise, interest only added to IV-D program if a court has ordered the interest amount to be calculated by another entity and has approved amount. The court shall assess interest on the amount of support an obligor failed to pay if the court determines the failure to be willful and the arrears accrued after July 15, Interest rate is equal to the federal short-term rate. Interest rate is determined by the Financial Institutions Commissioner at the rate applicable on the day the child support order was issued.
Heavy exposure to troubled mortgages in the form of collateralized debt obligation CDOs , compounded by poor risk management, led Citigroup into trouble as the subprime mortgage crisis worsened
Simplicity -- the good old days. Raising the federal funds rate will dissuade banks from taking out such inter-bank loans, which in turn will make cash that much harder to procure.