In the final flurry of legislation adopted during the 2019 legislative session, Florida lawmakers passed a little-discussed bill that could translate into nearly $350 million in tax relief for state corporations over the next two years.
House Bill 7127, approved by the House in a partisan 71-41 vote and endorsed by the Senate, 39-1, will provide state corporations shelter from “surprise liabilities” fostered by “bubbles of gain” created by the federal Tax Cuts & Jobs Act of 2017 [TCJA].
The bill extends for two years a temporary 2018 provision that offers refunds and rate cuts to offset taxable interest expense and depreciation deduction gains, and “decouples” the state from a Global Intangible Low Tax Income [GILTI] levy created by the TCJA.
According to state analysts, under HB 7127, state corporations will recoup $166.3 million in fiscal year 2020 and $182.3 million in fiscal year 2021 in refunds and tax-rate cuts.
Although the bill “decouples” the GILTI from state tax codes, HB 7127 is essentially a complex two-year punt to give lawmakers time to revise tax codes to address how federal tax changes are incorporated into state law.
Among changes supported by the Florida Chamber of Commerce, the Florida Retail Association and Florida TaxWatch, among others, is to also “decouple” the state from taxing the TCJA’s depreciation deduction.
When the Florida Legislature convened in January 2018, the massive TCJA had only been on the books for two weeks and its ramifications were still hazy.
Among impacts apparent to state analysts were some savings in the TCJA could end up costing Florida corporations millions if they were directly incorporated – or “piggybacked” – into state code without revising Florida laws.
If piggybacked into state code under existing laws, analysts estimated the state’s tax base would increase by 13 percent and impose an “accidental” tax increase on many Florida corporations.
Confronted with complex uncertainties without the time to analyze options, in 2018 legislators punted, adopting a one-year cap on the amount of corporate income tax the state would receive with rebates for businesses that paid above that limit.
The 2018 bill required an automatic reduction in the corporate income tax rate if actual net collections for fiscal year 2019 exceeded February 2018 revenue estimates by 7 percent. For one year, corporate tax rates could be reduced by the same percentage if actual collections exceeded that 7 percent limit.
The bill also required “excess collections” paid in 2018 be refunded to corporate taxpayers. Before the legislature convened in March, the DOR estimated that would amount to $166.3 million in fiscal year 2019.
Under Florida law, corporate taxpayers must “add-back” to taxable income any amount gained by “bonus” depreciation deductions from changes in federal law without a corresponding revision in state codes. They can then subtract from taxable income one-seventh of the deduction annually for the next seven years.
The GILTI component changed the way some corporations are taxed on global income. Prior to the TCJA, federal corporate income taxes applied to a corporation’s entire worldwide income with credits for foreign taxes paid.
“The goal is to tax [global] income, but at a lower rate, reflective of the fact it really is international income, and to take into account any foreign taxes paid,” writes Jared Walczak, a senior policy analyst with the Center for State Tax Policy at the Washington, DC-based Tax Foundation.
GILTI is a “guardrail” to “curb international tax avoidance techniques like profit shifting and the parking of intellectual property in low-tax countries,” Walczak said in a January 2019 analysis.
GILTI drops the federal tax rate on this income from 21 to 10.5 percent until 2025, when it increases to 13.125 percent, he explained, adding tax credits are also applied – generally – with a 50 percent deduction on foreign taxes paid.
“Unfortunately, many states bring GILTI into their tax codes due to how they conform to the federal law,” Walczak writes. “This is already a departure from what we might think of as the typical approach to state taxation, which stops at the water’s edge, but it quickly gets even worse, because state taxation of GILTI is [accidentally] far more aggressive than federal taxation.”
Many states assess corporate taxable income before federal credits or deductions, meaning savings through GILTI under the TCJA can be taxed as gross income without the 50 percent deduction or the credits for foreign taxes factored in.
So, while “the 2017 federal tax reform legislation represented a significant retreat from the taxation of international income, the opposite effect is playing out in states due to the way state tax codes are drawn to new federal provisions,” Walczak writes.