Trump Tax Law Should Spur States to Split From Federal ‘Pendulum’

The Trump administration’s massive tax-and-spend legislation is the latest in a long line of ideologically driven federal tax overhauls, but one little-discussed element deserves extra scrutiny.

The much-maligned global intangible low-taxed income structure has been replaced with a new, broader, and blunter instrument: the net controlled foreign corporation tested income.

The shift ramps up the federal tax burden on foreign income earned by US multinational corporations. States now face the higher-level and critical choice of whether to conform to complex international tax changes that may be temporary and could expose them to long-term legal risk and economic fallout.

The NCTI system should prompt states to reassert control over their own tax policy and decouple their revenue systems from Washington’s ideological pendulum. By conforming, states risk entangling themselves in a tax policy designed for federal objectives, not state realities.

Eighteen states and Washington, DC, employ rolling conformity in some fashion, meaning they automatically sync some portion of their tax codes with changes to the Internal Revenue Code as they happen.

In times of stability, rolling conformity is a practical and pragmatic tool to reduce the administrative burden on state governments. In times of instability, however, it looks more like an abdication of policy discretion. There’s no hearing, no fiscal debate, no hard questions answered in a public meeting.

As is often the case in matters of policy, convenience collides with complexity. The transition from GILTI to NCTI was designed to recalibrate how the federal government taxes foreign subsidiaries in the context of a global economy.

Under rolling conformity, states are set to roll up NCTI into their own tax codes, bringing in broader statutory definitions of foreign income—but not adopting federal safety valves such as foreign tax credits and allocations.

But the real takeaway here isn’t about particular percentages, credits, or apportionments—it’s that federal tax policy is shifting, fast and dramatically. These shifts seem poised to increasingly divorce states’ fiscal and legal interests.

This isn’t an extrapolation from a single data point—we’ve now cycled through the first Trump administration’s 2017 Tax Cuts and Jobs Act, the Biden administration’s attempts at corporate surtaxes, and now the second Trump administration’s “One Big Beautiful Bill” Act.

Each time, there were sweeping rewrites of facets of international taxation. Each future administration may well bring a new theory of what global income should look like for purposes of US tax returns. And each almost certainly will continue assuming that it applies at only the federal level of government.

When states conform, automatically or affirmatively, they inherit federal objectives that don’t necessarily fit their legal or economic positioning.

NCTI is just the latest example of this drift. It reflects a political position predicated on clamping down on global base erosion, using federal tax credits to offset any harmful effect, and increasing US international competitiveness. None of those are necessarily high on the list of, say, Kansas’ goals or tax policy priorities.

Instead of asking whether NCTI is better than GILTI, state legislatures should step back and ask if they should be reflexively copying any of these policies. States that rush to adopt the new system may be thrusting themselves into a legal mess.

For example, NCTI pulls more foreign income into the tax base by design but buffers that income through credits, deductions, and other policy mechanisms intended to prevent double taxation. States rarely offer analogous foreign tax credits, they don’t have Section 250 deductions, and they don’t have constitutional authority to tax income earned entirely beyond their borders—at least not without a costly, lengthy legal battle.

Without modifications, conformity decisions could flood state courts with challenges over their ability to tax income extraterritorially, allocation of expenses, and questions about apportionment. And the lawsuits almost surely would drag on long after federal tax policy has moved on to its next iteration.

Conforming to NCTI might feel like business as usual or, in some states, a rare opportunity to opt out of a single unhelpful federal policy. That thinking is too narrow—and invites continued passivity.

Changes, they are a’coming. And what states need now is intentionality: an immediate proactive review of conformity statutes, decoupling where federal law misaligns or could misalign with state priorities, and a zealous defense of state fiscal sovereignty.

This isn’t the time for the states to let Washington lead them; it’s time for states to think and legislate on tax policy themselves.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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