Florida lawmakers are dealing with the consequences of the new federal tax law, which sharply cuts the amount of taxes paid by corporations.
Lawmakers are trying to understand the impact of the Tax Cuts and Jobs Act of 2017, which took effect Jan. 1 and cut the federal tax rate paid by major corporations and businesses from 35 percent to 21 percent. It also changed deductions and other accounting methods that can alter business’ tax liabilities.
Since Florida’s corporate income tax, which is 5.5 percent, is based on federal tax liability, changes in federal law can affect the amount of tax revenue the state collects from businesses. Last year, Florida collected nearly $2.2 billion in corporate taxes, making it one of the state’s most significant revenue sources, outside of the sales tax.
Senate Finance and Tax Appropriations Chairwoman Kelli Stargel, a Lakeland Republican, is sponsoring an annual bill (SB 502) that conforms or “piggybacks” Florida’s corporate tax law with the federal tax code, adopting or modifying changes made at the federal level.
But the piggyback bill, which is scheduled to be heard by the Senate Appropriations Committee on Tuesday, has taken on much greater significance this year because of the sweeping nature of the federal tax changes. It also must accommodate the new Bipartisan Budget Act of 2018, which was signed into law this month and also includes some changes in federal tax law.
“This is a very complex issue for our corporations who look to this bill each year to try to clarify how they’re going to file their corporate income tax,” Stargel said before her subcommittee unanimously approved the piggyback bill last week.
“We’re trying to recognize that right now it’s just early for everybody, so we’re trying to give some accommodation to the parts that are the most significant swings from maybe what it was last year,” Stargel said.
State officials, businesses and others are waiting for clarification from the federal government and the Internal Revenue Service on how many aspects of the new tax law will be applied.
In fact, the uncertainty has left state analysts unable to say exactly what the fiscal impact of the piggyback bill could be on state revenue, although the assumption is it could have an undetermined “negative” impact through the end of this budget year and the new fiscal year, which begins July 1. In the long term, it is anticipated to have a more positive impact.
To offset the initial negative impact of the federal law, Stargel’s piggyback bill is “decoupled” from the new federal tax code on several key provisions, including a measure in the federal law that allows corporations to immediately deduct the cost of new equipment and other capital.
Under Stargel’s bill, Florida corporations would have to spread the “federal bonus depreciation” over seven years and lessen its impact on the state tax collections, rather than trying to claim it immediately.
The decoupling is a routine occurrence for Florida and other states, according to a Jan. 29 report from the National Conference of State Legislatures on the new federal tax law.
“The goal is to incentivize businesses to invest more and grow the economy, but states that conform would likely see a reduction in revenues in the short term,” the legislative policy group said about the depreciation measure. “Most states have already decoupled or modified the existing federal bonus depreciation provisions.”
But while some federal tax law changes could reduce state revenue, Florida officials and national analysts also say other provisions could increase tax collections for the states.
One issue still being analyzed is how state tax collections will be impacted as corporations bring back, or “repatriate,” overseas cash and assets to the United States.
“This would raise revenue for the states in the short run as businesses bring back monies held overseas, but tax experts seem divided on whether this will be a small amount or a windfall,” the NCSL report said.
In acknowledging the uncertainty and complexity of the federal tax changes, Stargel’s bill also would direct the state Department of Revenue to create a workgroup to continue to analyze the revamped tax code and offer recommendations.
The workgroup would begin offering periodic updates in May, with a final report to state lawmakers and the governor by next Feb. 1, about a month before the start of the 2019 legislative session.
Stargel said the work group will provide “the opportunity to give a little bit of time for us to figure out what this is doing and report back.”