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“Tax Cuts and Jobs Act” and West Virginia

On Behalf of | Dec 17, 2017 | Firm News

A couple of observations:

Because it is simpler, West Virginia (like many states) largely conforms to the federal tax code. Each year, the State Tax Department drafts two or three “update” bills to conform to changes in federal tax code pertaining to personal income tax and corporate net income tax. Many times, the update bills are included in the governor’s legislative package that is submitted to the Legislature. Unlike the relatively innocuous and routine updates of recent years,  however, this year might be different. The Tax Foundation reports that federal tax changes in the Tax Cuts and Jobs Act expand the base of taxable income in many different ways. For instance, a state that uses federal taxable income or AGI as its starting point would likely see an increase in revenue due to the elimination of many federal itemized deductions. The federal changes include rate cuts to offset the broader bases, but states set their tax rates independently. According to the Tax Foundation, absent state-level changes, states would have a larger tax base without correspondingly lower rates, leading to higher state-level revenue. We look forward to reviewing what tax legislation is introduced when the West Virginia Legislative Sessions begins in January. Among other things, revenue experts at the West Virginia Department of Revenue will likely search for possible increases and decreases of some significance tied to changes in the treatment of business interest expense, net operating loss rules, the elimination of certain above-the line adjustments, depreciation changes, Section 179 changes and a possible deduction of some pass-through entity business income. We are also curious if the state’s withholding tables might need to be amended. Suffice it to say, any changes aren’t simple to make. In addition to the legislative process, the state tax department will have programming changes to make, form development, and training of its taxpayer service personnel all in an effort to serve the state.

With respect to state and local government, it appears likely that the tax bill will change government borrowing costs. The reasoning is that the corporate income tax rate reduction means banks will earn more money off other types of investments; the result being muni rates may have to go up to be competitive.