[Video] Tax Reform and Your Business: States' Response to the Federal Tax Bill
States will need to evaluate whether and how they adjust their tax codes to the updated federal Internal Revenue Code, federal standard deductions, or exemptions. This includes withholding changes, W-4s, taxability, credits, and the general tax code rules. Paychex senior compliance analyst Laurie Savage explains this situation further.
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Hi, I'm Laurie Savage, senior compliance analyst here at Paychex. I'm here today to talk about the federal tax overhaul, and in general, what that means to the states, how this impacted state tax policy. When we look at states, we have to keep in mind that most states, in some way, connect themselves to the federal code, the Internal Revenue Code.
So when the federal code changes, they automatically are in some way, shape, or form changing their tax code. Now, some states don't change it automatically. Some states change the code with date-specific references to the Internal Revenue Code. Some states reference the standard deduction that almost doubled. And some states reference the personal exemptions that no longer exist. So what those states need to do, in general, they're going to need to look at how their code, their state tax code, ties into the federal tax code.
Do they base their federal taxability, the starting point, on adjusted gross income? That didn't change too drastically with the federal tax overhaul. But if you look at if they base it on taxable income, which is after your standard deductions and your personal exemptions are factored in, that changed drastically. So those kind of states are going to have to look at what that does to their state budget as well as their population – what portion of their population is affected. And they're going to have to potentially legislate different tax policy, either decoupling more from what the federal government does, or tying themselves further.
Like I said, some states are date-specific at how they go into the code. In addition, certain things in the federal tax overhaul had a more dramatic impact in the populations of certain high-tax states. The state and local income – income tax and property taxes are a big issue for states like New York, and New Jersey, and California. And by capping those limits, those states are now looking at how they can help their citizens best utilize the federal tax code in a way that there's deductibility.
So there have been some interesting proposals in Governor Cuomo's of New York, his State of the State address. He suggested that maybe looking at ways of items that are deductible – so payroll taxes are deductible, where now income tax is maxed out at a particular limit. So there have been proposals like that, but they're controversial and complex.
So whether they're actually viable to tie into the tax code to take advantage of debt deductibility is yet to be seen. But the states are getting a little bit creative in their own tax policy. So as the state legislatures start picking up and start pulling apart how the federal impacted their budgets and population, we might see further legislation at what direction states are going in.