States Have a Hand in Making Forms Taxing
High on the list of tax-time grumbles is annoyance over the differences between federal and state income tax forms. “It’s irritating to be geared to the federal and then be confronted by the specific peculiarities of the state, with its different definitions, different allowances,” says a California psychologist. “Why can’t they just take a percentage of everyone’s federal tax?”
Actually, they could : Federal tax law even encourages it, offering IRS services to administer and collect state taxes. But states would have to conform closely to federal code, either taking a percentage of the calculated federal tax, or calculating their tax on the federal taxable income, inserting relatively few extra credits and adjustments of their own. And that, some think, would put state revenues and state welfare at the fiscal and ideological mercy of the federal government, the first step toward relinquishing all state’s rights.
Three states--Nebraska, Vermont and Rhode Island--do make their state income tax a percentage of the federal tax paid (North Dakota only offers the option), thus giving their residents a tax form of unusual simplicity. Nebraska’s has lines for federal adjusted gross income, federal taxable income, federal tax before credits, Nebraska’s percentage of that tax (19% now) and a number of its own adjustments, subtracting various taxes already paid and some special credits.
Psychological Effect
“I don’t see why this couldn’t work anywhere,” says Gary Heinicke, administrator of the research division of Nebraska’s Revenue Department. But other states worry about recognizing and responding quickly enough to any federal tax reform that--because of the tie-in--would lower state tax revenues. Nebraska, says Heinicke, “analyzes any change in the federal law even before it’s passed,” prepared to adjust its percentage rate upward to compensate: Since 1981, federal changes have driven it from 15% to 18% to 20% to 19%.
Some also fear the psychological effect of such visible adjustment. “If taxpayers are paying 11% this year and 14% next year,” says Carol Horowitz, director of legal services for California’s Franchise Tax Board, “it’s hard to convince them they’re not paying more.” Most states are equally unenthusiastic about endorsing all the social and philosophic goals embodied in the federal tax code, and the further down the federal form they set their starting point for state computations--federal tax liability like Nebraska, taxable income, adjusted gross--the more federal policies they incorporate into their tax, encouraging everything from investments to home ownership. “California may want to be in a position,” says Horowitz, “to deal with California issues not of federal interest”--and to dispense with some federal concerns.
At the same time, no one can deny the obvious advantages of similarity, or at least the look of it. What states want, says John Gambill at the Federation of Tax Administrators in Washington, is “the best compromise between some flexibility and some conformity.”
Illinois, for example, which considers itself conformed “to a fairly high degree,” asks for federal adjusted gross income on its form’s first line, says Revenue Department spokesman Helen Adorjan. The taxpayer can then subtract several things (Social Security and certain retirement benefits, military pay), and add back others (capital gains deducted, dividend exclusion, some municipal interest), but only those. “There’s too much advantage to us in the conformity. We do a federal-state tape match, for instance, for our enforcement,” says Adorjan, “and the further we go from their adjusted gross, the more difficult to match.”
Procedural Conformity
New York believes itself “middle road” in conformity, says Howard Glaser, spokesman for the state’s Taxation and Finance department. “Middle road” means some 50 “modifications” of the federal terms, starting--but loosely--with adjusted gross, from adding back some depreciation deductions to deducting some college tuition. But conformity is still an ideal: a recent change lets taxpayers at least “turn the (two) forms over at the same time.”
Even California, perhaps “the most out of conformity of all the states,” says Franchise Tax Board tax law specialist John Pavalasky, boasts of its new “procedural conformity” (successor to its previous “piecemeal” or “selective” conformity). Translation: “If conforming would make no difference in policy and no fiscal difference to the state,” says Horowitz, “then we conform.”
The result, says Pavalasky, is dozens of areas in which the state doesn’t conform, but hundreds in which it does. California tends to accept purely “procedural” or relatively minor changes in federal law; “Unless there’s a major policy or revenue effect,” says Pavalasky, “the instinct is to conform.” But the Tax Board estimates (with limited explanation) that the state would lose $250 million if it followed federal rules on accelerated depreciation, $100 million to $300 million on capital gains rules, and $230 million to $300 million on IRA deductions.
All those major social policies further clutter California’s form out of conformity, benefiting everyone from renters (limit: $137 credit) to employers who encourage ride-sharing. Many require separate forms and work sheets, and some, says a tax lawyer, “hardly justify having such a difference from the federal.”
Such clutter may be in the nature of legislatures, which like Congress, want to do more with taxes than just raise revenue. “They have good purposes,” says Illinois’ Adorjan, “but it opens the door to everyone wanting their own little deductions. You try to hold the line, but it’s only a matter of time.”
Indeed, one theory is that state tax complexity is partly a function of the time a legislature has had to tinker with it. California’s complicated system goes back to 1935. Illinois’, still relatively simple, was established only in 1969, and Nebraska’s, begun in 1967 and one of the simplest of all, just last year added its first windfall gift, a line for donations to a fund for non-game and endangered species that is known as the “chickadee check-off.”
