Conformity and State Income Taxes: Suggestions for the Crisis

Abstract

To guarantee adequate revenue in the post-COVID-19 era, state governments should consider using all possible tools at their disposal. This article explains how and why state governments should evaluate their degree of conformity with federal tax changes in order to achieve this purpose. We recommend that state governments consider:

Adopting either a static or selective conformity that enables the state to choose the federal tax changes it is adopting, rather than automatically adopting all changes. In most cases, in the current crisis conditions, this should primarily involve accepting revenue-enhancing provisions and rejecting those that reduce revenue.

Rejecting or postponing conformity to several changes contained in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including changes to the business interest deduction rules
(section 163), net operating losses (section 172), charitable deductions (section 170),
and several employer-related provisions, most of which are revenue losers.

Adopting, if they have not done so already, the revenue-enhancing provisions of the global intangible low-taxed income rules, originally contained in the Tax Cuts and Jobs Act of 2017.

Keywords: tax law, tax policy, fiscal federalism, conformity, state tax, budget crisis

JEL Classification: K34