Counterplan generates sufficient revenue

The federal tax law’s extraordinary windfall for corporations and very high-income households will further concentrate income and wealth at the top. States may wish to reject this approach and to offset some of the windfall for those at the top by raising taxes on these households and investing the resulting revenue in middle- and lower-income Americans. Examples of policies that states could implement include: •Recouping the ill-advised tax break for “pass-through” income. Only a small number of states are coupled to the new federal deduction for pass-through income and will need to decouple from it to avoid losing revenue. But all states could go further and impose a surcharge on pass-through income that will benefit from this unwarranted giveaway, the benefits from which are highly tilted to the wealthy and large companies. 13 Alternatively (or in addition), states could follow the example of California, Illinois, and Massachusetts and impose a low-rate tax directly on pass-through businesses. 14

Establishing a strong minimum corporate income tax. States could impose a corporate minimum tax based on a measure of in-state corporate activity that is less easily manipulated than corporate profits, such as a minimum tax tied to gross receipts or the “value added” by the firm — basically, the difference between the company’s purchases of inputs from independent firms and its sales of finished products. New Jersey and Kentucky had low-rate gross-receipts-based minimum taxes in the recent past, and New Hampshire still levies a “Business Enterprise Tax” based on the value added by the company.

Closing loopholes that profitable corporations use to avoid state taxes. The minority of states with corporate income taxes that haven’t yet implemented “combined reporting” — a tax accounting method that treats parent corporations and their subsidiaries as one corporation for tax purposes — could do so. And both they and existing combined reporting states could follow the lead of Oregon, Montana, and several other states and include foreign tax haven subsidiaries under this method. This will help states avoid revenue losses they are otherwise likely to experience because the shift to a territorial corporate tax system at the federal level will increase incentives for multinational corporations to disguise U.S.-earned profits as foreign profits.

Raising state-level taxes on the profits of corporations and/or raising rates for the wealthiest households. More than 15 states have cut their corporate income tax rates in recent years in misguided attempts to boost their economies. The tax windfall that corporations will receive under the federal tax legislation creates an opportunity for states to raise state corporate tax rates to fund investments in middle- and low-income families while still leaving corporations paying significantly lower combined state and federal corporate taxes than before. States could similarly raise income tax rates for very high-income residents to recoup some of the windfall these households will receive from the federal tax legislation. States also could consider creating a state surcharge on carried interest to recoup revenue lost at the federal level to a widely derided loophole that allows hedge fund managers and others to pay lower taxes on their income than other wage earners and salaried individuals.