Published on 10/01/2018 9:49:48 AM | Source: Dion Global Solutions Ltd

US States facing direct hit to revenues from tax changes: Fitch Rating

Posted in Economy News| #Economy #Expert Views #Fitch Rating #US #Tax

The Tax Cuts & Jobs Act (TCJA), signed into law on December 22, includes multiple changes to US federal tax provisions that could directly affect state revenues given the numerous linkages between state and federal tax codes, says Fitch Ratings. Under the current law, some states estimate that revenues could rise or fall significantly in upcoming fiscal years and forecasts will face greater volatility.

States will consider various regulatory and statutory changes in response, but the single-party passage of TCJA in Congress could make it challenging to enact offsetting legislation in increasingly polarized state political environments. The linkages are difficult to generalize. The District of Columbia and 41 states levy broad-based income taxes and nearly all have linkages to changed federal tax code provisions.

The District of Colombia and 31 of these states allow federal itemized deductions for the individual income tax which TCJA narrows and eight states conform to the federal personal exemption, which TCJA eliminates entirely. These changes could expand individual income tax bases for some states and lead to increased revenues. Conversely, twelve states conform to the federal standard deduction for individual income taxes, which is doubling under TCJA. This could potentially shrink the individual income tax base for those states and reduce revenues.

Several state executive and legislative fiscal agencies have reported preliminary assessments of how TCJA might affect revenue collections. Colorado estimated in December that the TCJA could yield an additional USD 200 million-USD 330 million (2%-3%) in additional general fund revenue from individual and corporate income taxes in fiscal years 2019 and 2020. In contrast, a recent press report indicates that Montana estimates the TCJA could reduce annual general fund revenues by approximately USD 46 million-USD 76 million (roughly a 2%-4% decline) in tax years 2018 through 2020.

Governors and legislatures will consider mitigating actions in the legislative sessions that begin over the next several weeks. Maryland's governor already announced his intent to release proposed legislation to reverse what he estimated to be 'hundreds of millions of dollars' in potential revenue increases for the state.

Fitch notes that state legislatures and governors have found it difficult to reach a consensus on fiscal matters and ten states began the current fiscal year without enacted budgets. Those difficulties may extend to legislation related to TCJA, particularly in states with narrow legislative majorities or split control between the executive and legislative branches.