Comformity Boosts Key Business Tax 40 Percent

Increased Virginia corporate income tax revenue under full conformity. The 2023 figure is 46 percent of the 2019 baseline tax. Source: Chainbridge Software LLC

A decision by the Virginia General Assembly to fully conform state tax rules with recent changes in federal tax law could result in major increases in state corporate income tax collections, totaling an additional $1.4 billion over six years, an outside consultant has concluded.

Virginia’s corporate income tax under current rules is projected to collect $912 million in this current fiscal year, compared to $861 million last year.   The impact of conformity starts slowly, adding less than $30 million in tax during the first year.  But by the third year collections would grow 20 percent, or $182 million, and by the fifth year (2023) the extra tax of $417 million is 45 percent of the baseline for 2019.

These projections are part of the Chainbridge Software LLC analysis released by Governor Ralph Northam on August 17.  It stated the business provisions with the most significant Virginia revenue impact (listed with their six-year total tax increase) include:

  • Limits on the net interest deduction ($619 million)
  • Amortization of research and experimental expenses ($454 million)
  • Repeal of the domestic production activities deduction ($274 million)
  • Modification of the net operating loss deduction ($229 million)

It cites two new federal provisions which will also reduce state revenue if Virginia conforms:

  • Increase in IRC section 179 expensing (reducing taxes $202 million over six years.)
  • Simplified accounting for small business (reducing taxes $195 million over six years.)

On the federal side the various changes in the rules were accompanied by a drop in the tax rate from 35 to 21 percent, and these projections assume the same rules at the state level but no change in the state’s 6 percent corporate income tax rate.

Full chart of projected impacts of changes in federal business tax rules. Source: Chainbridge Software LLC

The tax conformity discussion so far has focused on the personal income tax impacts, with full conformity adding potentially $3 billion in state individual income collections over the first six years.  The state collects far more personal income tax than corporate tax, with more than $14 billion in personal taxes projected for next year, so on a percentage basis the personal tax impact is small in comparison to the business impact.

Along with the six listed above, Chainbridge estimated the positive or negative impact of sixteen additional business income tax provisions.  Many were too small for its main model and the authors added a disclaimer that Internal Revenue Service guidance on many questions is still unavailable.  The chart does illustrate the complexity of what Congress did on the business side.

One goal of the new federal rules was to encourage companies holding cash in foreign accounts to repatriate the funds to the United States, which normally would then also be taxable at the state level.  This is one area of federal tax law where Virginia has traditionally differed, allowing businesses a full deduction for foreign-sourced income.

The Chainbridge analysis assumes that deduction remains on the business tax returns, but also assumes some of those repatriated profits will be distributed and taxed as stockholder dividends.  That would add about $85 million in personal income tax collections for 2019 and 2020.  This provision has the acronym GILTI, for “global intangible low-taxed income.”

The business tax changes were at the heart of the decisions made by Congress, with the goal of stimulating investment.  The General Assembly could be concerned that such dramatic impacts on business taxes within Virginia would be detrimental to growth and question the proposal for full conformity on the corporate side or consider a corporate tax rate cut to reduce the impact.

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5 responses to “Comformity Boosts Key Business Tax 40 Percent

  1. Well the time is upon us when the phrase the “Haner Treatment” means a thorough in depth analysis… the rival perhaps better than any we might see in that nasty old MSM…

    Of course credit also goes to the Gov and Mr. Lane for having the analysis done 3rd party and not by “legislative services”.. which makes me think there might be story there also.

    No one has (so far) stepped up to dispute the 3rd party analysis.. so give the Gov a second credit – for having an objective analysis done AND then releasing it in toto rather than cherry picking the parts he like and deep-sixing the parts he does not…

    We’re early in this administration but this is straight-shooter stuff…

    I’m not a big supporter of business taxes to start with .. and in this day and time – jobs are exceptionally important – that we “incentivize” them. What better way to do that – that keeping business taxes low?

  2. Governor Northam has made it a priority to improve Virginia’s Best States for Business rankings. I wonder what the impact of all these added personal and corporate income taxes, assuming they stay in place, would be. I wonder if the Guv has considered that angle.

  3. Virginia will have to watch very carefully what other states do or indeed risk becoming less competitive. The corporate tax rate in North Carolina is going to 3 percent or is already there. My first response to this was Virginia’s corporate income tax rate should drop to no higher than 4….certainly by the years when these changes really kick in (2022 and on). But as previously noted, the state is under fiscal stress and will be loathe to part with any of this windfall/tax hike.

    Thanks, Larry – I’m just scanning these reports, and don’t really consider this heavy lifting at all. But long familiarity with these issues means I see things others might not. It took ten seconds on a calculator to add up the first five years of additional tax revenue and get that total of $3.6 billion, maybe 30 seconds to compare the projected corporate tax increases to the current base amount….and two eye-popping headlines were right there.

    • A year ago all three of these recent posts would have instead been emails to my clients at Newport News Shipbuilding, or a few years before to my tax policy group at the Virginia Chamber of Commerce. Bacon and our readers get them for free! But they might have read much the same.

  4. Interesting thing. At the Federal Level – the tax cut is not a spending cut and in fact it is financed by deficit spending that IS increasing the deficit and debt despite some who claim otherwise.

    Tax cuts, spending to raise U.S. deficit to $1 trillion by 2020, CBO analysis shows

    http://www.chicagotribune.com/news/nationworld/ct-analysis-tax-cut-deficit-20180409-story.html

    That’s the very essence of Jim B’s “Boomergeddon” scenario.

    Then because of a little thing called “conformity” that virtually no one outside of tax guys and policy wonks know about – it will increase taxes almost across the board and at the same time undermine the progressive nature of the tax code by increasing the rate on lower income payers.

    So the two combined tax cuts at the Fed level and increased taxes at State level has a perverse effect which will reverse if the tax cuts expire as current law is written. At which point – conformity if not changed would actually result in a tax cut at the Va level … complicated…

    Meanwhile back at the ranch as they say – the Federal deficit and debt are doing what the GOP used to spend most of their time demonizing the Dems about – so now they’ve switched to demonizing the Dems over “extreme” positions over health care (that will “blow up” the budget) and so-called “social justice” issues .

    As long as the economy is booming who cares about the deficit and debt?

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