Tax Cuts and Jobs Act (TCJA) heralded the most significant changes to our federal tax system in over thirty years, affecting both individual and corporate income taxes. The corporate tax changes to a large degree reflected a realization that our federal corporate income tax system was in need of fundamental reform. Our combined federal and state corporate income tax rate – formerly the highest in the industrialized world – reduced our nation’s economic competitiveness. Further, our worldwide system of taxation created significant disincentives for companies to remain headquartered in the United States. The corporate changes in the TCJA addressed these competitive disadvantages by reducing the corporate income tax rate, providing incentives for domestic investment, and adopting a quasi-territorial system of taxation.
One unintended consequence of federal tax reform is a significant increase in state corporate income taxes. This arises because states typically conform to federal provisions that impact the tax base, but not the federal corporate tax cuts. The EY study assesses the impact that the corporate tax provisions of the TCJA will have on respective states’ corporate income taxes. Its overall conclusion is that conformity with federal tax reform will result in an estimated state corporate tax base increase averaging 12% for the first ten years, with a range generally between 7% and 14% in individual states.
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