The Alabama Department of Revenue last month published an analysis of the Tax Cut and Jobs Act’s (TCJA) effects on the state’s tax law, and its conclusions could cause some companies to pay more in taxes.
Though the federal corporate income tax rate has been reduced, the tax bill offsets that revenue loss with other provisions broadening the tax base in the form of new taxes and limited deductions, and those offsets will automatically be applied to Alabama’s tax law.
The reason is because Alabama’s corporate income tax laws conform to federal tax laws, per the state’s statutory framework. When lawmakers in Washington make a change to the federal corporate income tax, that change automatically applies to the corporate income tax Alabama, with a few exceptions.
“General speaking, so goes the federal income tax, so goes the Alabama income tax for corporations,” Bruce Ely, a partner at Bradley in Birmingham and adjunct tax professor in the University of Alabama Graduate Accounting Program, told Yellowhammer News.
Among the revenue-raising provisions in the department’s analysis is the limit to business interest deductions.
Companies utilize the business interest deduction to write off borrowing costs associated with taking out loans to pay for operations.
According to Ely, it is also common for companies to borrow money, loan it to a smaller sister company so operating as a sort of internal bank and then write off the interest. That deductibility has been reduced on the federal level and, as a result, has been reduced in Alabama.
Another piece that Ely says will be punitive to corporations in Alabama is the global intangible low-taxed income or “GILTI” provision and the repatriation tax provision.
Under the tax reform bill, companies repatriating foreign-earned income back to the U.S. will have to pay a tax on that income to the federal government at a reduced rate. If that company does business in Alabama, the department says the company will also have to pay an apportioned tax to Alabama.
The state legislature has the ability to “de-couple” from such provisions so they will not become state law, and thus avoid raising taxes on corporations, but the provisions are already in effect and the legislature doesn’t reconvene until next March.
Gov. Kay Ivey could call a special session to address these questions, but that is unlikely.
Aside from those specific provisions, another way the tax bill could increase corporate income tax revenues results automatically from the federal rate cut.
Alabama allows taxpayers to fully deduct federal income tax payments against their tax liability to the state, one of only two states to do so.
“As you pay less to the federal government, you’ll almost automatically pay more to the state government because your state tax deduction is less,” Ely explained. “It’s just an automatic thing. You can’t blame the Department of Revenue, or the legislature, or the governor. It is simply a matter of the Alabama constitution.”
A study commissioned by the Council on State Taxation estimates a net 11 percent increase in corporate income tax revenue for Alabama, following the tax bill’s passage. That number doesn’t account for additional revenues raised by the reduced individual state tax deduction for payment of federal income taxes.
Ely believes that 11 percent corporate increase could raise between $60 and $75 million this year.
“It’s just a politician’s dream, because the politician hasn’t had to pass a bill or take a vote. It’s automatic. It’s manna from heaven for the Alabama Legislature,” Ely said.
In a statement to Yellowhammer News, the Department of Revenue said that its analysis is not act of policymaking, but rather an explainer.
“The Department’s TCJA guidance serves the limited purpose of explaining where Alabama’s income tax laws are tied to the TCJA changes (and where not),” the statement said. “It is not a policy statement regarding whether we should be tied to any particular TCJA provision. We have and will continue to discuss TCJA issues with various stakeholders.”
Correction: An earlier version of this article said the state constitution requires that Alabama’s corporate income tax laws conform to federal tax laws, whereas conformity is dictated by a statutory framework.
@jeremywbeaman is a contributing writer for Yellowhammer News
