Expanding State Fiscal Capacity, Part I: A New and Improved Consumption Tax Paired with a Tax on a Federal Windfall (the QBI Deduction)

Florida Tax Review, Forthcoming

42 Pages Posted: 4 Feb 2019

See all articles by Darien Shanske

Darien Shanske

University of California, Davis - School of Law

Date Written: January 28, 2019


The Tax Cut and Jobs Act (TCJA) was the most significant piece of federal tax legislation passed in thirty years. Not surprisingly, the TCJA has spurred the states to rethink their tax systems. This rethinking of state taxes was necessary even before the TCJA. To date, the states have primarily considered reforms that respond to the capping of the State and Local Tax (SALT) deduction, and the current proposals, if enacted and successful, would only return the states to where they were in 2017, which is to say to quite mediocre revenue systems.

This Article, the first in a series, argues that the TCJA should provide the final motivation to move the states to reform their tax systems in fundamental ways that made sense even before the passage of the TCJA. The reform that is the focus of this Article is the implementation of entity-level consumption taxes. The states should have implemented such taxes long ago for a number of reasons. Prominent among such reasons is that the United States undertaxes the consumption tax base generally and, if well-designed, a low-rate entity-level tax is not likely to spur much additional evasion.

The passage of the TCJA makes such a tax more appealing because this tax would be imposed on business entities and businesses can still deduct state and local taxes. Thus this proposal represents a response to the new SALT cap.

Two other complementary reforms are developed. First, states should tax the windfall given to certain unincorporated businesses by the TCJA. This too can be a form of SALT workaround, as the revenues from the tax on the windfall can be used to reduce taxes on the taxpayers hurt by the capping of the SALT deduction.

Finally, states should bolster their laws governing the apportioning of the income of multistate corporations. These laws already govern the apportionment of the state corporate income and would also control the apportionment of the tax base for the two new taxes proposed in this Article (namely, a new tax on consumption and on the federal windfall).

Keywords: Tax Policy, State Tax Policy, SALT Cap, Section 199A, Equitable Apportionment

Suggested Citation

Shanske, Darien, Expanding State Fiscal Capacity, Part I: A New and Improved Consumption Tax Paired with a Tax on a Federal Windfall (the QBI Deduction) (January 28, 2019). Florida Tax Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3324557

Darien Shanske (Contact Author)

University of California, Davis - School of Law ( email )

400 Mrak Hall Dr
Davis, CA CA 95616-5201

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