Internal Revenue Code Conformity Bill

Time is running out

South Carolina Radio Network
May 01, 2018 - 11:11 am
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MAY 1, 2018 BY RENEE SEXTON (South Carolina Radio Network)

Filing income tax returns could become a nightmare for South Carolina residents next year if state legislators do not address a bill which would conform the state’s tax code to the new federal code.

SCRN

Hartley Powell, Director of the SC Department of Revenue, testifies before Income Tax Subcommittee

That’s the argument from Gov. Henry McMaster and others as a House panel moves to adjust the state’s income tax laws in response.

“Failure to conform our state income tax code before the end of this year will create confusion, frustration and chaos when South Carolinians attempt to file their taxes next year,” McMaster wrote in a letter Monday to Senate President Pro Tempore Hugh Leatherman and House Speaker Jay Lucas.

Time is starting to run out this legislative session for the House Income Tax Subcommittee as it discusses the Internal Revenue Code Conformity bill. The bill is designed to allow state tax codes, rules and deductions to follow standards set by the federal tax code. The changes were part of the Tax Cuts and Jobs Act proposed by President Trump and passed by Congress in late 2017.

“We have got to do something,” said House Ways and Means Committee Chairman Brian White, R-Anderson.  “When the feds undertook their largest undertaking in some 25 years and actually are coupled and mirror them and try to make it simple on our people and they made it very complex on our folks.”

Prior to the 2017 changes, income tax filers in South Carolina could use information and deductions from their federal tax returns on their state forms. Now those deductions and rules are inconsistent with one another. So, while most South Carolinians are expected to save money on their federal tax returns, their state taxes could increase, causing confusion for accountants, tax preparers and even those who use online filing services such as TurboTax.

South Carolina Department of Revenue director Hartley Powell told the committee at its most recent meeting that, if conformity is not passed, South Carolina taxpayers would have to make up to 30 adjustments on their state income tax returns to come up with the correct federal taxable income. Previously, taxpayers used information from their federal returns to complete their state forms. He said decoupling from the federal system would have more negative impacts on South Carolina taxpayers than positive.

“So you go to your federal return, you come out with your federal taxable income, today you just put that right over as a starting point on the South Carolina return,” Powell told the subcommittee. “That will not be able to happen anymore. You cannot use the federal taxable income number. You’ll have to recalculate it.”

White was irked by the comments.

“The federal government, after 25 years, decided to do something to make some sweeping changes in the way we work with them” he said. “One of the six states that actually have to make it easy on our people, the federal government, once again has seemed to mess up a one-car funeral.”

The non-conformity has consequences beyond inconvenience for taxpayers filing their returns.

“It’s a budget issue,” White said. “It’s always been fairly simple and there’s always been a revenue up or down one way or the other with conforming on most years. But this year, with all the different changes they made, didn’t match up so well to our tax code so now we have to match it to our tax code.”

If officials with the Department of Revenue are unsure how much to anticipate in income tax revenues, departments and their officers don’t know how to allocate funding in their budgets. If the legislature approves a state budget that is higher in expenditures than income tax revenues collected, it could place the state in a budget deficit.

“We’ve got to figure out what’s in the best interest of our citizens and we’ve got to keep the creditworthiness of the state intact and that’s kind of our mission and our goal,” White said. “If (Powell) can’t estimate revenues for us to be able… to write a budget, and then everybody starts filing amended returns… we then create a bigger mess when it gets to the budget.”

But with six days left in the legislative session, this bill, which was introduced on March 20, remains in the hands of the Ways and Means Committee. Legislative rules require a supermajority for the Senate to take it up this year.

White said the legislature is required by the state Constitution to pass a conformity bill every year. But the wording in the bill has been the same for the past 16 years.

It is possible that the bill could be included in the Sine Die resolution and the General Assembly could address it when it reconvenes in the summer.

“We have got to do something,” White said.

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