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Eyes on the Legislature: The Federal Tax Cuts and Jobs Act and the Risk for Florida Corporate Taxpayers
This is an alert to corporations subject to the Florida corporate income tax: The impact of the recently enacted Federal Tax Cuts and Jobs Act (“Act”) on Florida tax revenue is unknown. During its 60 day regular session beginning today January 9, 2018, the Legislature will invariably consider whether the Act is likely to result in a revenue shortfall for Florida. If so, lawmakers may decide that modifications to the Florida corporate income tax code (or other tax provisions) are necessary to preserve revenues. Events on this issue could unfold swiftly, and vigilance is warranted. This issue is described further below.
In general, Florida’s corporate income tax “piggybacks” on the Internal Revenue Code, by using federal taxable income as the starting point for purposes of determining the Florida tax base. However, this conformity is not absolute; the Florida corporate income tax code embodies several deviations from federal taxable income, which are used to calculate “adjusted federal income,” the pre-apportionment tax base for Florida purposes. Some of the deviations increase the Florida tax base (“additions”), and others reduce it (“subtractions”). A prominent example of Florida additions to the federal tax base is the Florida response to the bonus depreciation and section 179 expense provisions enacted by Congress in 2008 and extended as recently as 2016. Although these federal changes primarily altered the timing of deductions, Florida “decoupled” from them to avoid adverse immediate revenue impacts.
The recent federal tax overhaul, most of which is effective January 1, 2018, contains myriad changes to the computation of federal taxable income for corporations, including the establishment of new or expanded deductions and the repeal of others. Before the federal tax package was enacted, Florida expected to collect nearly $2 billion in corporate income taxes during fiscal year 2017-2018. The issue for Florida’s budget writers is whether the aggregate effect of the federal bill will increase or decrease Florida corporate income tax revenues and whether additional “decoupling” is required to satisfy Florida’s budgetary requirements. In the coming weeks, Florida’s Revenue Estimating Conference is expected to analyze the impact of the federal changes for this purpose.
The analysis is being undertaken at a time when multiple demands are putting a squeeze on Florida’s budget outlook. These include hurricane recovery, an opioid crisis, children’s health insurance, and education. Although the conservative Legislature is unlikely to enact tax increases, particularly in an election year, measures to avoid a loss in revenue may be viewed differently, as they have been in the past. Because Florida taxes are generally lower than those of many other states and there is no personal income tax here, far-reaching proposals to restructure the entire Florida tax system, of the kind proposed on January 3 by Andrew Cuomo of New York, are unlikely. A more realistic prospect is that there will be some decoupling from the Act.
An exhaustive discussion of the federal legislation is not intended here, but a few salient observations are offered:
- As Florida imposes its income tax only on corporations, individual Florida taxpayers will not be directly affected by any tinkering with the Florida income tax code as a result of the federal Act.
- The reduced federal corporate income tax rates are also unlikely to affect Florida corporate income tax liabilities. Florida’s 5.5% rate is set independently of the federal rates.
- Provisions of the Act which could be perceived as a near-term threat to the Florida tax base include increased bonus depreciation for qualified property; increased section 179 expensing for qualified property; and repeal of the alternative minimum tax.
- Other changes to the federal tax law could increase Florida tax revenue. For example, the dividends received deduction is reduced, as is the deduction for interest. Some contributions to capital are now included in taxable income, and the non-recognition of gain for like-kind exchanges is limited to transactions involving real property. The domestic production exemption is repealed.
- Many of the federal changes involve thresholds and phase-outs over time, and there are major amendments to the taxation of international business. These factors add to the complexity of revenue forecasting, and also require decisions about the forecasting horizon.
- Interpretive issues in the Act present additional challenges and opportunities. For example, the Act amends Internal Revenue Code (IRC) section 118 relating to contributions to capital, to treat as gross income amounts contributed by a governmental entity. However, a grandfather clause provides that the amendments do not apply to contributions of government entities after the December 22, 2017 date of enactment that are “made pursuant to a master development plan that has been approved prior to such date by a governmental entity.” The Act does not define “master development plan,” which leaves Florida policymakers some flexibility to define it.
- Although not directly related to revenue forecasting, Florida taxpayers that are members of affiliated groups will invariably revisit their Florida elections as separate or consolidated filers.
Quantifying the effects of the many federal changes with any reliability is difficult but the task falls to Florida’s revenue estimators. They have limited time and the assumptions and methodology they employ will have a bearing on how the legislators respond. To the extent that revenue estimators employ “worst case” modeling, the prospect for some type of decoupling will increase, with a resulting increase in the tax base. A Revenue Estimating Conference set for February 9, 2018 is presently the first scheduled occasion on which this topic will be formally considered. Although the issue may be discussed sooner, depending on when the revenue estimators hold an Impact Conference to determine the revenue impacts of SB 502, which is this year’s piggyback bill. There is some speculation that the Act’s negative revenue impacts will be overstated as the revenue-positive implications may be more difficult to estimate than those that negatively impact revenues. Taxpayers who have an interest in this process may be able to foster sound decision-making through proactive engagement.
About the Authors:
Robert S. Goldman offers clients over 30 years of experience practicing in state and local taxation. He represents clients in audits, protests, litigation, rulemaking, tax planning, and legislation. His experience includes all the major state and local taxes (sales taxes, property taxes, corporate income taxes, communications service taxes, gross receipts taxes, insurance premium taxes, documentary stamp taxes). Mr. Goldman’s range of experience spans diverse industries including retail, manufacturing, energy, leasing, hospitality, telecommunications, government contracting, health care, transportation, and the service sector. He may be reached at firstname.lastname@example.org.
Michael B. Dobson practices in Dean Mead’s Tallahassee office. His practice focuses on Governmental Relations, Real Property, Public Records and Administrative law. Prior to joining the firm, Mr. Dobson worked as a staff attorney for the Florida House of Representatives, Ways and Means Committee. In that role, he drafted and analyzed legislation, counseled legislators and staff on a variety of ad valorem tax and Florida constitutional law issues, and presented at committee meetings. During law school, Mr. Dobson served for two sessions with the Florida House’s Appropriations Committee. He may be reached at email@example.com.