One of my favorite quotes comes from Ben Franklin, made shortly after President Washington signed the Bill of Rights. In a letter penned to French scientist Jean-Baptiste Leroy in November 1789, Franklin wrote: “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”
The Tax Cuts and Jobs Act, signed into law by President Trump on December 22, 2017, represents the largest overhaul of the U.S. tax code since 1986. At the state level, the changes to the federal tax code will have profound yet varying degrees of impact.
This comes at a time when, according to the National Conference of State Legislatures, most states are experiencing the “tightest budgets at any point since the Great Recession,” and “spending for major programs, such as Medicaid and education, is generally outpacing revenue growth.”
A stealth tax increase?
Most states couple their tax codes with the federal tax code on many types of personal and corporate income taxes. As a result, some states will actually receive a windfall as a result of the federal tax code overhaul. This will happen because unless the state chooses to “decouple” from many of the federal code changes, the tax bases will expand.
If a state conforms to the federal code and does not decrease its tax rates, more state revenue will be generated. Some states have chosen (or will choose) to use the windfall to shore up budget priorities, while others have chosen to decouple from certain federal provisions so that the windfall is reduced or eliminated altogether.
The New York Legislature, for example, approved a budget on March 30th that recognizes some of the federal tax code changes and decouples from others. For life insurers, most state tax codes provide that premium taxes paid are “in lieu of” corporate or business income taxes, which mitigates the impact of these state tax increases.
There are only 10 states that impose business income taxes in addition to premium taxes, although credits for one tax against the other are typically available. However, in those 10 states, a life insurer’s total state premium and income tax liabilities could increase based on a combination of factors, such as specific lines of business, state of domicile (and related retaliatory tax implications), or individual state tax credit limitations.
The long and short of it
State budget writers will continue to face uncertainty in determining exactly how the federal tax changes will impact their state tax revenue. We will likely see state legislation dealing with these matters for the next several years.
Bruce Ferguson is Senior Vice President, State Relations at the American Council of Life Insurers (ACLI). He oversees ACLI’s legislative and regulatory advocacy at all levels of state government, including organizations such as the National Association of Insurance Commissioners and associations of state legislatures and governors.