New federal tax bill might prompt changes to state tax codes

As states plan their budgets, many will find there are pros and cons to the new federal tax bill. Some states will experience a new increase in revenue, while most will notice the new law does nothing to reduce the significant balance of state and local accounts receivable.

According to the Board of Governors of the Federal Reserve System, the total balance of accounts receivable for state and local governments was approximately $366.5 billion by the third quarter 2017. With the new tax laws removing many breaks for taxpayers, it may become even more difficult to recover those accounts receivable.

To be sure, not all states have greeted the new federal tax law with a warm reception. Nevertheless, the new bill will present a rare opportunity for some states. 36 states use the federal Internal Revenue Code as the starting point for their state’s taxes. Because the new law changes the definitions of income, many states will experience an increase in revenue from the tax reform, according to Tax Foundation.

Because of the nature of the changes to the federal code, states have an opportunity to rewrite their own tax laws. Idaho, Iowa , Michigan, and Missouri are among the states considering big tax overhauls.

The Tax Foundation notes:

A majority of states will see a revenue increase if they do nothing, but their taxpayers also will pay more. That’s because the new federal law eliminated many tax breaks, meaning federal taxes are assessed on more income. The federal tax code, however, tried to help taxpayers out by also increasing the standard deduction, lowering their tax liability. If states use the income line from the federal form as a starting point, but don’t adjust the deductions underneath, state residents would pay more.

In addition to rewriting their tax codes, some states are considering using the projected increased revenues to bolster their rainy day reserves, fund new projects, or give their constituents a tax break.

Some analysts are urging caution, as many of the federal changes are temporary, expiring in 2025. Moreover, the tax laws will not diminish the increasing accounts receivable inventories maintained by state and local governments, reinforcing the need for a top-performing accounts receivable management partner.

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