Florida could reap more than $4 billion in new corporate income tax revenue over 10 years if it continues to follow the bulk of the latest federal tax code provisions, according to a new state analysis.
It’s a substantial gain for a state whose corporate income tax revenue was $2.4 billion in the latest fiscal year. Business taxpayers and advocacy groups are urging the state to avoid this unintended tax increase by revising Florida’s tax laws during the 2019 legislative session, which begins in March.
The potential tax increase results from changes in the 2017 federal tax law. The state’s revenue department released its final report Feb. 1 from a nearly year-long study of the potential state-level impacts.
Unlike many states, Florida only had to decide how to respond to the corporate side of the federal tax overhaul because it doesn’t impose an individual income tax. The state’s corporate income tax rate is 5.5 percent.
The Florida Legislature already showed its interest in limiting any tax increase during its 2018 session when it created a rate-cut trigger to refund corporate tax collections exceeding a certain level. Gov. Ron DeSantis (R) has predicted that rate cut will be triggered for fiscal year 2018-19.
The Legislature will have to dig beyond the revenue department’s “largely informational” analysis to decide where to match and where to diverge from the federal tax code, said Mark Holcomb, a tax attorney at Dean Mead & Dunbar in Tallahassee.
“The report lacks analysis and guidance on why the Legislature might want to opt for one approach or another on discrete issues,” Holcomb told Bloomberg Tax on Feb. 4.
GILTI, Interest Expense
He noted one exception, where the department’s report observes potential constitutional problems with states following the new federal regime for taxing global intangible low-taxed income (GILTI). The 2017 federal tax law created GILTI as a new category of income that aims to bring foreign-earned income back to the U.S. States that don’t require combined reporting of a corporation’s income might be seen as treating domestic income differently from foreign income.
If the state follows them, the GILTI policy and the new lowered limits on companies’ interest expense deductions would result in the bulk of Florida’s tax increases. These two provisions would yield a combined increase of more than $3 billion over 10 years, according to the report. The department relied on federal impact estimates from the Joint Committee on Taxation but acknowledged the actual Florida impacts could differ significantly.
The state also estimates it will see significant increases in corporate income tax revenue over 10 years if it adheres to federal tax code changes on net-operating loss restrictions ($1.7 billion), repeal of the domestic production activities deduction ($711 million), and amortization of research and experimental expenses ($869 million).
Meanwhile, two other federal changes related to treatment of foreign income and dividends would reduce the state’s revenue by about $2.7 billion over 10 years, if the state follows them, according to the report.