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Does Your State’s Individual Income Tax Code Conform with the Federal Tax Code?

As the federal government continues to debate tax reform, many are asking an important question: How is my state’s tax code impacted?

The key to understanding how federal tax reform would impact your state's tax code and revenue is conformity.

States frequently seek to conform many elements of their tax codes to the Internal Revenue Code (IRC) to reduce compliance costs.

Currently, 18 states conform to the IRC on a static basis, meaning on a specific date, and 20 states conform on a rolling basis, meaning they adopt IRC changes as they occur.

 

Click the map above to see whether and how your state conforms.

 

The first large area of conformity is federal definitions of individual income. Twenty-seven states begin with federal adjusted gross income (AGI) as their income tax base, six states use federal taxable income, and three states use federal gross income.

What does this mean in the context of federal tax reform? How states define their tax bases matters a great deal for potential revenue impacts.

Take, for instance, a state that uses federal taxable income or AGI as its starting point. It would likely see an increase in revenue under the House and the Senate tax plans

Due to the elimination of deductions under both plans, the federal tax base would become broader. Absent state-level changes, states would also have a larger tax base without correspondingly lower rates, leading to more revenue.