State and local business tax. a year of dramatic state and local tax reform? 1 May 2013

Transcription

1 State and local business tax policy trends: will 2013 be a year of dramatic state and local tax reform? 1 May 2013

2 Disclaimer Ernst & Young refers to the global organization of member firms of Ernst & Young global limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited located in the US. This presentation is 2013 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying or using any information storage and retrieval system, without t written permission i from EYGM Limited. it Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young and its member firms expressly disclaim any liability in connection with use of this presentation or its contents by any third party. The views expressed by panelists in this webcast are not necessarily those of Ernst & Young LLP. Page 2

3 Circular 230 disclaimer Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code (IRC) or applicable state or local tax law provisions. These slides are for educational purposes only and are not intended, d and should not be relied upon, as accounting advice. Page 3

4 Today s presenters Joe Crosby Steven Wlodychak Robert Cline Multistate Associates Ernst & Young LLP Ernst & Young LLP Page 4

5 Today s agenda Overview of the state of the states Drivers for 2013 state and local tax law changes and tax reform Select 2013 state tax proposals State tax cases to watch in 2013 Federal bills that could impact the states Page 5

6 Leading indexes for state economies: percent increase over next six months Source: Federal Reserve Bank of Philadelphia, state leading indexes, February Page 6

7 Resurgence of US energy production Fracking in North Dakota Source: The Guardian (UK) Why North Dakota glows at night big picture 3 January 2013 Page 7

8 Total state tax collections continue growth over 2008 previous peak $800 $782 $800 Billion s $700 $600 $ th Q increase of 4.9% (over yr. earlier Q) $500 $533 $400 Source: US Census, Quarterly State and Local Government Tax Collections, various quarters. Note: Dollar amounts are total state taxes for 12-month periods ending in each quarter Total state tax collections, $billions Total state tax collections, 3rd Quarter of 2008 Page 8

9 State tax growth is moderate as property taxes start to rebound 14% 12% 11.7% 10% 8% 6.5% Local property taxes 8.8% 6% Perce entage change 4% 2% 0% -2% -4% -6% -8% -10% -12% 3.5% Calendar years Total state taxes 4.4% -11.3% Note: Growth rates shown are for 12-month periods ending in each quarter versus the 12-month period ending in the same quarter the previous year. Source: U.S. census, quarterly state tax collections Page 9

10 State tax outlook State taxes have grown for 12 consecutive quarters following five quarters of decline during the recession th quarter growth (yr. over yr.) was strongest in last six quarters due to 10.3% growth in personal income taxes; but sales tax growth in th quarter is sluggish (+2.2%) FY 2013 state tax collections are meeting expectations 39 states expect FY 2013 tax collections to meet or exceed current forecasts (NCSL State Budget Update: Fall 2012) $6 billion in voter-approved temporary tax increases result in projected California budget surplus Rebound in state taxes providing an opportunity for states to consider changes in current taxes and major tax reforms Page 10

11 Today s agenda Overview of the state of the states Drivers for 2013 state and local tax law changes and tax reform Select 2013 state tax proposals State tax cases to watch in 2013 Federal bills that could impact the states Page 11

12 Historic 2012 elections Historic 2012 federal election results? Re-election of President Obama Democrats continue to control the Senate Republicans continue to control the House Result? Continued divided government stalemate in Washington Republicans: No tax increases Democrats: No reduction in government programs Have well-off pay their fair share (i.e., tax increases on wealthy) Sequester Page 12

13 Historic 2012 elections How about in the states? Red states (GOP), got redder! Blue states (Democrats), got bluer! Even in states with divided government New Jersey (Gov. Chris Christie) Arkansas Missouri New Mexico (first Latina governor Susana Martinez) Things are getting done Page 13

14 POST-2012 election: who controls state governments? Republicans Democrats Split Based on control of both the governor s office and both houses of state legislature WA MT ND MN ME CA OR NV ID UT WY CO SD NE* KS IA MO WI IL IN MI OH KY WV PA VA NY CT NJ DE VT NH MA RI MD AK AZ NM OK AR MS TN AL GA NC SC HI TX LA * Nebraska has a non-partisan state legislature FL Source: Multistate associates Page 14

15 Is having a super majority a slam-dunk for pushing through the governor s proposals? Republicans super majority both houses Democrats super majority both houses Super majority More than two-thirds vote of a legislative house WA CA OR NV ID UT MT WY CO ND SD NE* KS MN IA MO WI IL IN MI OH KY WV PA VA NY ME CT NJ DE VT NH MA RI MD AK AZ NM OK AR MS TN AL GA NC SC HI TX LA * Nebraska has a non-partisan state legislature FL Page 15

16 Today s agenda Overview of the state of the states Drivers for 2013 state and local tax law changes and tax reform Select 2013 state tax developments State tax cases to watch in 2013 Federal bills that could impact the states Page 16

17 What s driving state and local tax reform? Rebound in taxes, budget surpluses, tax fairness debates, change in party/one-party p y control of state houses Responding to political base Republicans pushing reduction of rates/elimination of entire taxes with emphasis on economic development Democrats pushing fairness, increased progressivity, it base expansion, restoration of spending cuts due to recession Why the move away from income-based taxes? Uncertainty of federal income tax changes decoupling complexities State tax competition everyone wants to be like Texas Improved state tax rankings Reduced tax volatility Increasing share of income from pass-through businesses More general tax policy objective of shift to consumption taxes Sales tax has its limitations Alternative ti forms of business entity taxes? Page 17

18 Road map of state tax reform/changes Governor proposals to expand sales tax bases Business purchases of tangible property: p NE Services: LA, MN and OH Income tax rate changes party in control matters Reductions: KS (repeal), LA (repeal), OH (20% cut), IN (10% cut), SC (14% cut in top rate) Increase rates: CA (adopted Prop 30), MA, MN Sales tax changes Rate increases: CA (adopted Prop 30), KS, LA, VA (adopted up to 25% rate increase for transportation funding); new tax in OR Rate decreases: MA, MN, OH OR legislation to ask voters to adopt a sales tax to fund income tax rate reductions Page 18

19 Road map of state tax reform/changes Corporate income tax Rate reductions: LA (repeal), NM (adopted 22% cut), RI (22% cut) Apportionment: NM (adopted a phased-in, elective single sales factor for manufacturers) Business property p taxes ID adopts business tangible property tax exemption ($100k) MI adopts 10-year. business personal property tax phaseout Transportation funding VA replaces per gallon gas tax with 5.1% tax (3.5% if Congress requires remote sales tax collection); increased titling tax MD applies sales tax to motor fuels and indexes gas tax AZ voters adopted 0.5% sales tax increase for infrastructure Severance tax (oil and gas) increase proposals: LA, OH, CA Page 19

20 What are the characteristics of the most competitive business tax systems? The states with the most competitive tax systems have combinations of: Single sales factor (destination) apportionment formula No franchise tax based on net worth Relatively low combined state and local effective sales tax rate on business purchases Low statutory tax rates Exclusions of business purchases of property and services from tax base No personal property tax on business equipment or state credits for property taxes Competitive property tax rates on real business property Broad-based business entity taxes imposed on both C corporations and pass-through entities (e.g., partnerships, LLCs, S corporations) Minimal taxation of foreign-source income Low individual income tax rates?? Page 20

21 Tax proposals in super majority states? California Democrats 2012 adoption of ballot initiatives: Prop 30 Highest marginal personal income tax rate in the US (13.3%) (for seven years) ¼ cent increase in state sales tax rate (for four years) Prop 39 Mandatory single sales factor Coupled with destination sourcing and bright-line nexus, while corporate tax rate did not increase, these changes mean increased taxes for non-california companies (and surprises for international business with destination sales to California) Is tax reform over in California? Modifications to California s historic Proposition 13? Split roll for property taxes (i.e., no limit on commercial property taxes)? Page 21

22 Tax proposals in supermajority states? Massachusetts Democrats Gov. Patrick s proposals p (January 2013) Increase personal income tax rate from 5.25% to 6.25% Eliminate personal deductions (provide greater progressivity) Decrease short-term capital gains rate from 12% to 6.25% Decrease sales tax rate from 6.25% to 4.5% Expand categories of taxable software and services Corporate taxation Eliminate special treatment of security company Destination sourcing for services and intangible property Implement throwout rule Legislative counteroffer: $500 million (not governor s $1.9 billion) Page 22

23 Tax proposals in supermajority states? Kansas Republicans Gov. Brownback already implemented in 2012 Eliminated tax on income from pass-through entities (e.g., partnerships, p LLCs, S corporations) Subtract K 1 income from federal income and add back K 1 deductions to net to no Kansas tax on pass-through income School funding case declared that it is illogical to provide tax decrease equal to constitutional state funding requirement for education Proposes: Eliminating Kansas personal income tax altogether Leaving sales tax increase permanent Page 23

24 Single-party control does not mean easy adoption of state tax reform proposals Republicans control state Democrats control state WA CA OR NV ID UT MT WY CO ND SD NE* KS MN IA MO WI IL IN MI OH KY WV PA VA NY ME CT NJ DE VT NH MA RI MD AK AZ NM OK AR MS TN AL GA NC SC HI TX LA * Nebraska has a non-partisan state legislature FL Page 24

25 Minnesota tax reform proposal Current tax structure Governor s initial proposal Current proposal (26 April 2013) Sales and use tax Current rate is 6.875% Reduce rate to 5.5%. Broaden base to cover services Fewer exemptions Reduce sales tax rate to 6% Expand base to "digital goods and select consumer services Corporate income tax Current rate is 9.8% Reduce rate to 8.4% Less subtractions Finnegan Approach Economic substance test for business transactions Conforming to IRC with respect to foreign entities Disallowing dividends received deductions from REITs Same as initial proposal Property tax Inflation adjustment applies No inflation adjustment for two years Same as initial proposal Personal income tax Three income tax brackets New income tax bracket for higher wage earners Same as initial proposal p Page 25

26 Ohio tax reform proposal Current tax structure Governor s initial proposal House proposal (Sub. H.B. 59) Sales and use tax 5.5% state sales tax rate. Services are generally not taxed Reduce the rate to 5% Broaden base to cover most services Exempts essentials of modern life Reduce local rates to reflect base expansion Retain current rate. No expansion of sales tax base to services Individual id income tax Nine brackets with top rate of 5.925% Reduce the rate by 20% over three years Top rate to drop from 5.925% to 4.74% Allows 50% deduction for sole proprietorships or pass-through entities on first $750k of income One-time 4% rate reduction in % across-the-board tax rate cut effective 1 January 2013 No deduction for passthrough income Severance tax Severance tax on new horizontal wells is $0.03 per million cubic feet Tax rate on crude oil is $0.20 per barrel. No tax on natural gas liquids Increase severance tax rates for new horizontal wells Increases on taxes on crude oil New tax on natural gas No change from current law Page 26

27 Louisiana tax reform proposal Current tax structure Governor s proposal Current proposal (26 April 2013) Personal income tax Progressive personal income tax rate top rate 6% Eliminate personal income tax Governor tables proposal, seeks legislature s input Corporate income and franchise tax Progressive Five brackets Top rate = 8% (>$200k) Net worth tax 0.15% (First $300k) 0.30% (Over $300k) Separate return reporting Eliminate corporate income and franchise taxes Governor tables proposal, seeks legislature s input Sales and use tax 4% rate Local rates average 4.85% Services not taxable Broaden state sales tax base to include more services Raise state rate to 6.25%. Governor tables proposal, seeks legislature s input Administrative reforms Provide for new, independent tax court Radical change to current local sales tax administration Governor s proposal still in play Page 27

28 What s wrong with taxing business services under a sales tax? What s wrong with taxing business services? Adverse effects from existing and proposed sales taxation of business investment and services, EY study prepared for COST (April 2013) Page 28

29 What s wrong with taxing business services under a sales tax? A retail sales tax should be designed to tax final consumption of goods and services by households Business exemptions for input purchases are fundamental components of an ideal sales tax, not tax expenditures Sales taxes currently tax too few household purchases and too many business purchases Recent proposals to expand sales taxes to services is primarily a business tax issue: An estimated 70% to 80% of the additional taxes would be collected from business-to-business purchases Page 29

30 What s wrong with taxing business services under a sales tax? Pyramiding Taxing services primarily purchased by business exacerbates the pyramiding problem Proposals provide few business-to-business sales exemptions A retail sales tax on services without exemptions for business purchases is, in fact, a gross receipts tax at a very high h rate For example, if a 6% sales tax is imposed on the cost of a service embedded in three sales in the production and distribution chain, the effective tax rate on the sale to the final consumer is 18% Final effective tax rates are invisible i ibl and uncertain Additional tax policy issues Defining which services are taxable Sourcing of services which state can tax the service? Regressivity of final tax burdens Page 30

31 What s wrong with taxing business services under a sales tax? Pyramiding puts in-state firms at a competitive disadvantage Firms selling in national markets cannot pass the tax forward to customers even if final sales are exempt, pyramiding remains States will be challenged to collect the sales tax on even the final sale of services into a state Ernst & Young LLP simulated the effect of applying sales taxes to business purchases of services for the 10 largest states (by gross domestic product) Total state business tax increases would range from $1.4 billion a year in Georgia to $13 billion annually in California In percentage terms, total state business taxes would increase by 12% (New York) to 25% (California) per year Six of the largest states would have total state business tax increases higher than 20%. Page 31

32 Failed state experiences with expanding retail sales taxes to services Florida 1987 taxation of advertising national publications ceased deliveries to Florida Repealed after six months substituted with 1% rate increase Massachusetts 1990 expanded d tax to services, repealed before effective date Michigan 2007 repealed after one day Maryland 2007 expanded sales tax to computer services in November, repealed before it could take effect in July Governors withdraw support for proposals in LA, MN, NE Might these experiences develop into dramatic business tax reform? Implement broad consumption-based tax (e.g., CA Business Net Receipts Tax)? Page 32

33 Today s agenda Overview of the state of the states Drivers for 2013 state and local tax law changes and tax reform Select 2013 state tax proposals State tax cases to watch in 2013 Federal bills that could impact the states Page 33

34 Cases to watch in 2013 Amazon.com/overstock.com New York Court of Appeals upholds constitutionality of state s click-through nexus provision (28 March 2013) Will US Supreme Court hear the case? Barnesandnoble.com New Mexico Supreme Court considering whether in-state store s use of intangibles was sufficient to create sales/use nexus for affiliated on-line retailer Oral argument held on 11 February 2013 Gillette California Supreme Court grants petition and will consider whether taxpayers are allowed to make a Multistate Tax Commission (MTC) equally weighted three-factor apportionment factor election IBM Will the Michigan Supreme Court hear a case on whether a taxpayer can make an election to use the MTC apportionment formula in lieu of the state formula? Page 34

35 Today s agenda Overview of the state of the states Drivers for 2013 state and local tax law changes and tax reform Select 2013 state tax proposals State tax cases to watch in 2013 Federal bills that could impact the states Page 35

36 Congressional interest in state tax policy Congressional bills introduced Remote seller nexus sales tax (e.g., Main Street Fairness Act) Received largely symbolic senate approval (75 votes) on 22 March Senator Baucus (D MT) sees no benefit to Montana residents and voiced his opposition (Montana doesn t have a sales tax) Congressional bills that will likely be introduced State income tax withholding on short-term business travelers/taxing non-residents Business Activity Tax Simplification Act Wireless Tax Fairness Act Digital Goods and Services Tax Fairness Act Page 36

37 Questions and discussion

38 Ernst & Young Assurance Tax Transactions Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved. BSC no This publication contains information in summary form and This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.