The massive coronavirus relief bill that President Joe Biden enacted last week raises key questions for state tax professionals, questions of policy on how it affects the power of the government. State to specific technical questions on whether States will comply with certain provisions.
The $ 1.9 trillion coronavirus relief bill signed by far-left President Joe Biden also passed various tax provisions that states will need to assess. Next to Biden, left to right, are Speaker of the House Nancy Pelosi, Senate Majority Leader Chuck Schumer and Vice President Kamala Harris. (AP Photo / Alex Brandon)
One of the most important questions for policymakers in government to know is whether the American Rescue Plan Act the provision prohibiting states from using the federal injection of funds to “compensate directly or indirectly … [states’] net tax revenues “tie their hands when it comes to tax reduction measures, including tax incentives.”
Some state tax practitioners are also concerned about how states will handle compliance with certain parts of the law, particularly the exclusion of up to $ 10,200 in unemployment benefits for some taxpayers. Others, meanwhile, wonder if there will be movement on a big issue that was to be widely used as a negotiating point for the passage of the law, but which is nowhere in sight – the ceiling. of $ 10,000 on the deduction for state and local taxes paid. .
Here, Law360 presents three big questions that state tax professionals have about the American Rescue Plan Act.
Does ARPA Stop States From Cutting Taxes?
State policymakers and tax practitioners noticed almost immediately that if states are to take full advantage of the $ 350 billion in cash that ARPA provides to states and local communities, it looks like they’re going to have to relinquish some autonomy. . While those who spoke to Law360 said that only explicit guidance from the US Treasury, which is still pending, can be completely clear, the consensus is that the law appears to prevent states from cutting taxes. If states cut taxes, from March 3 of this year until the stimulus money is spent, they will be required to forgo the equivalent stimulus amount, the tax professionals said. States.
“I think that’s a big deal,” Carl Davis, research director at the Institute for Taxation and Economic Policy, told Law360. “This has the potential to dramatically reshape state tax debates over the next two years.”
Nicholas Johnson, senior vice president of state fiscal policy at the Left Center for Budget and Policy Priorities, applauded the provision.
“Congress has made it clear that this aid is really meant to help states deal with the multiple pressures they face in the pandemic,” Johnson said. “It was never intended to pay for the state tax cuts.”
Johnson called the move “new and important,” saying he had never seen the federal government take such a step before. He added that the Treasury will have to step in to let states know what they can and cannot do.
It is not at all clear at the moment. Congress has defined a few broad categories of approved spending measures, including direct pandemic spending aimed at state economic recovery or public health, and certain infrastructure spending such as water, sewers and broadband, noted Scott Roberti, general manager of indirect taxation at EY. And he put in language prohibiting the use of the money for state tax cuts or for deposit in pension funds. But that raises as many questions as it answers, said Roberti.
“Can they use the money for economic development activities,” such as tax incentives, Roberti said. “I don’t know the answer to that. Hopefully there will be some Treasury advice because I think these are areas that states are hyper focused on as they try to restart their economies.”
Jared Walczak, vice president of state projects at the right-wing Tax Foundation, said it seemed clear the law sought to prevent states from passing “big tax cuts,” but agreed that there were a lot of nuances that are not explained. States often change their tax codes, he noted. They modify the administrative guidelines of existing tax programs. They offer deductions, exemptions and credits. To deny all of this is a serious federal intrusion into state power, he said.
A group of Republican senators agree. On Monday, Sen. Mike Crapo, R-Idaho, a prominent member of the Senate Finance Committee, filed the State Fiscal Flexibility Act, S. 743, to remove ARPA provisions that would prevent states from using relief funds to reduce taxes. Crapo also sent a letter to Treasury Secretary Janet Yellen asking the agency to clarify by March 22 how it will proceed with the transfer of funds to states and localities and what guidance it will give.
In a statement on Tuesday, Crapo said his state and others should have the right to give tax breaks to its citizens without being penalized.
“This [prohibition on tax cuts] encroaches on the power of states to design their own fiscal policies and invites partisan politics in federal and state relations, ”he said.
How will states comply with other tax provisions?
ARPA has made significant changes to benefits and credits, and has adopted a few miscellaneous tax provisions that states will need to pay attention to. Since the law was passed in the middle of tax season and many taxpayers have already filed their returns, it is not yet clear when or if some states will comply.
One of the most notable, according to tax experts, is the exclusion of the first $ 10,200 in unemployment benefits for those earning less than $ 150,000 per year.
“This is a big deal that I think could impact states,” said Patrick Duffany, managing partner of tax practice at CohnReznick.
Duffany noted that the IRS, in a statement Friday, said those who received unemployment benefits last year who are no longer taxable due to recent pandemic relief legislation but who have already filed their 2020 statements are not expected to change those statements at this time. He said those taxpayers will have to wait and see if the IRS will automatically provide a refund or if they will eventually have to file an amended return. It could also affect some state tax returns, Duffany said.
Edward Renn, tax partner at Withers LLP, said the exclusion was well intentioned and directly targeted people who suffered during the novel coronavirus pandemic.
“This is clearly one of the parts of the bill that actually focuses on providing relief to those most directly affected by COVID,” Renn said. “Corn [implementation] is going to be a problem. “
As a general rule, taxpayers can assume that continuing compliance states will do whatever the federal government does, unless they specifically disassociate themselves from certain provisions. But that’s not necessarily true with ARPA provisions, noted Brian Myers, state and local tax partner at Crowe LLP.
Myers said states could find themselves in the same position as with paycheck protection loans. Many states have yet to decide whether they should comply with federal provisions exempting loan money from tax and making expenses funded by loan money deductible. The same could apply to the ARPA tax provisions, Myers said, for a reason many people may not realize – the provisions are outside the Internal Revenue Code. He said a few states have already noticed and have adopted language that includes compliance with the code and other relevant tax laws.
“You can’t just assume that because a state follows the Internal Revenue Code, it is repeating those provisions,” Myers said.
What happened to the repeal of the SALT cap?
One of the notable state and local tax aspects of ARPA is something that is not there. There is no mention of the $ 10,000 cap on the deduction for state and local taxes paid which was a centerpiece of the Federal tax review 2017 . State tax experts and policymakers had widely speculated that changes to the SALT cap would be included if the Biden administration introduced significant legislation to deal with the pandemic.
Senator Susan Collins, R-Maine, fueled this speculation with a December proposal to increase the ceiling for married couples filing jointly. She said at the time that the proposal could be included in legislation to tackle the effects of the pandemic. But he did not appear in the Consolidated Appropriation Act , signed by former President Donald Trump, nor in ARPA.
Roberti of EY said it might be too big at the moment. Congress should take into account the significant budgetary impact of raising the cap and, if so, at what income levels.
“I think it’s a challenge for Congress and the President, when and if they decide to take it up,” Roberti said.
Walczak said it was clear the president was focused on passing ARPA and couldn’t afford to lose a vote from a senator who might be against lifting the SALT cap or who had reservations. on this subject. He said it was not clear that raising the ceiling was a priority for Biden.
“The lifting of the SALT cap was not part of the president’s tax plan during the election campaign, and the farthest his team has gone is to say it’s something they would consider during deliberations with Congress, which is very different than making it a presidential priority, ”Walczak said.
Meanwhile, noted Scott Smith of BDO USA LLP, states appear to be proceeding as if the cap is going to stay in place. Every few weeks during current legislative sessions, another state adopts or considers the SALT cap circumvention solution. so far blessed by the Tax service – an entity-level tax on intermediary companies.
“It seems states are just moving forward with their own ideas,” said Smith, national technical manager for national and local tax practice. “They found their own way to respond.”
–Edited by Tim Ruel and Neil Cohen.
Update: This story has been updated with information about IRS guidelines on excluding certain unemployment benefits in ARPA.
For a reprints of this article, please contact [email protected]