Annual IRS conformity bill introduced in Rev & Tax; draws lots of questions
State Tax Commission Chairman Ken Roberts presented the annual IRS conformity bill to the House Rev & Tax Committee this morning; it was introduced, but only after lots of questions. The bill has a big fiscal impact: $17.2 million for the current year, fiscal year 2016; and $28.7 million for next year, fiscal year 2017. It stretches into both years because income taxes follow the calendar year, while Idaho’s fiscal year runs from July 1 to June 30.
The biggest portion of the impact, Congress’ move in late December to permanently extend an expired provision with regard to depreciation for small businesses, comes to $13.3 million in fiscal 2016, and $22.3 million in fiscal 2017. It was one of an array of “extenders” of various tax deductions and breaks that Congress belatedly enacted. Others included permanent extension of a deduction for expenses for elementary and secondary school teachers, which is estimated at $257,000 in Idaho impact; extension through 2016 of the deduction for college tuition, with an estimated $360,000 Idaho impact; and a similar extension for deduction of mortgage insurance premiums at $1.3 million. Another piece extended a break for people with underwater mortgages through 2016; that has an estimated $2.5 million Idaho impact. An energy-efficient commercial buildings deduction that got extended has a $301,000 Idaho impact.
The depreciation change involves “Section 179” deductions. That’s a section of federal tax law that allows small businesses, up to a cap, to deduct the full expense of an equipment purchase in a single year, rather than depreciating it over multiple years. It’s popular with farmers, contractors and other small businesses. The maximum amount that could be deducted was set at $25,000, but through a series of one-year extenders, that cap was raised to $500,000. That increase expired in December of 2014, and Congress didn’t act to extend it back up to $500,000 until Dec. 18, 2015. That meant that prior to that date, the law put the maximum deduction at just $25,000, which would have sharply limited the amount Idaho small businesses could deduct next year. That was the law in place when Idaho’s state revenue estimates were made.
The reason Idaho conforms to federal tax changes each year is because, like all states with state income taxes, Idaho uses the federal adjusted gross income as its starting point, rather than writing its own tax code from scratch. Federal deductions and other tax provisions affect people’s adjusted gross income. If Idaho didn’t conform, Idahoans would have to make calculations to reflect the change between their federal adjusted gross income and the one Idaho would use.
“Nonconformity has other consequences,” Roberts told the committee. “It requires taxpayers to add or subtract the non-conforming change on their Idaho return and adjust future returns, increasing complexity.”
House Majority Leader Mike Moyle, R-Star, and Rep. Dell Raybould, R-Rexburg, questioned the fiscal note, saying if a farmer deducts a tractor in a single year, that means he pays less in tax, but in future years, he pays more, because he doesn’t have the offset of the multi-year depreciation deductions on that tractor. Roberts said the ongoing fiscal impact comes because people continue to buy new tractors or other equipment in future years.
This year’s conformity bill also deletes a section Idaho added to its tax law in 2014 after same-sex married couples were allowed under federal tax laws to file joint returns; that section required Idaho same-sex couples to essentially recalculate their taxes and file separately for their state returns, because the state at that time didn’t recognize same-sex marriage. “Judgments in the U.S. Supreme Court have made (that) subsection legally inoperative, null and void,” Roberts told the committee. “Because of these rulings, this section should be removed from the Idaho statute.”
Rep. Heather Scott, R-Blanchard, questioned that. “It appears that the Tax Commission is conforming to the federal change in the definition of marriage. Is that correct?” she asked Roberts. He responded, “Those battles were fought in the court system. It was taken clear to the United States Supreme Court. They made a ruling. Whether you or I or anyone else agrees or disagrees, that was their interpretation. So this provision, Subsection C, is null and void.”
Scott said when Roberts returns to the committee for the conformity bill’s full hearing, she wants to hear “how you will address Article 3 Section 28 of the Idaho state Constitution in this change.” That’s the Idaho Constitution’s ban on same-sex marriage, which was invalidated when the U.S. Supreme Court ruled that same-sex marriage is legal nationwide.
Moyle moved to introduce the bill, and the motion passed unanimously, but committee members made it clear they’ll have plenty of questions for Roberts when he returns for the bill’s hearing.
Roberts said taxpayers with basic returns, with no business activities, were able to start filing their 2015 Idaho income tax returns yesterday, but taxpayers with more complex returns must await action on this bill. “Until the conformity bill is passed, other filers will not be able to file,” he said.
