July 21, 2019

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Taxation Matters

Parts of the 2017 federal tax overhaul will increase state-level taxes for some big businesses in Florida — and they're looking to the Legislature to cut out that downside.

Jason Garcia | 3/20/2019

Rental-car company Avis Budget, brewer Anheuser-Busch InBev and business groups representing everyone from Walt Disney to Walmart are lobbying Florida legislators to pass a package of corporate tax cuts totaling roughly $400 million this year alone.

At issue are tax-law changes created by the federal Tax Cuts and Jobs Act of 2017, which President Donald Trump signed into law in December 2017. The law reduced the federal corporate tax rate by 40% and allowed companies to immediately write off the full value of capital investments made over the next five years – a perk known as “bonus depreciation.”

The law also included provisions meant to broaden the overall tax base. For instance, the federal law reduces the amount of interest payments companies can take as tax deductions, which has been a longtime goal of tax reformers on both the left and the right. The law also imposes a minimum level of tax on profits that companies attempt to hold in tax haven countries.

Even with the base-broadening measures and the tax-haven minimums, the combined changes will amount to a 10% tax cut for businesses, which are expected to save $388 billion in federal income taxes over the next 10 years, according to an early analysis by Ernst & Young. Some companies say their tax liabilities will be wiped away entirely. Estero-based Hertz, for example, told Wall Street analysts last year that, after tax reform, “we do not expect to incur significant cash taxes in at least the next three to five years.”

But while state tax law tends to follow federal tax law, not all the provisions of the 2017 federal law are mirrored by state tax codes. One example: The base-broadening provisions of the federal law, which increase the amount of profits subject to income taxes, flow through to state tax codes, but the cut to the overall corporate income tax rate does not.

In addition, many states, including Florida, don’t follow the federal government’s practice of offering companies bonus depreciation because it would reduce state tax revenue significantly. In states that “decouple” from bonus depreciation, businesses won’t see any benefit on their state tax bills.

Bottom line for the big businesses: They’ll come out better overall, but their state taxes will go up. The Council on State Taxation, which represents more than 500 multi-state and multi-national companies, estimates that the federal corporate income tax changes will produce a 12% increase in state taxes nationwide – and a 13% jump in Florida, which raises roughly $2.5 billion a year from its 5.5% corporate income tax. The organization’s board of directors includes executives from Amazon, AT&T, Coca-Cola, ExxonMobil, HCA and Pfizer, among others.

Businesses and their associations are now lobbying legislators and regulators in states around the country to decouple from many of the base-broadening provisions in the federal tax bill. They’re using each success as leverage to warn other states that they risk becoming uncompetitive.

In a hearing last year with the Florida Department of Revenue, Victoria O’Connor, a senior tax counsel with Anheuser-Busch, urged the state to continue allowing full deductions for interest. “For capital-intensive companies, the most immediate consequence of these increased borrowing costs will be to limit the ability to invest in new projects,” she said, according to a transcript of the meeting.

The Anheuser-Busch executive also said Florida should break with the federal government in attempting to capture tax-haven income, an element of the law known as Global Intangible Low-Taxed Income, or GILTI. By decoupling from that provision, she said, “We believe Florida will reaffirm its reputation as a state that aligns its tax policies with international norms and keep the state competitive for local growth and investment for years to come.”

Other groups pushing the state to decouple from various provisions in the federal tax bill include the Council on State Taxation, the Florida Chamber of Commerce, the Florida Retail Federation, the Motion Picture Association of America and a D.C.-based group known as the State Taxes After Reform (STAR) Partnership that was formed after the federal tax law was signed and says it represents 24 of the biggest companies in the world. 

Rental-car companies have been particularly active. That’s because one of the tax breaks eliminated by the federal legislation was an important subsidy for the industry. So-called like-kind exchanges allowed rental car companies to perpetually defer taxes as they sold off used cars from their fleets by treating them as property exchanges since they also are continually buying new cars to replace them.

At the federal level, the benefit of bonus depreciation on new car purchases will more than offset the hit from no longer deferring taxes on used car sales, at least over the next few years. But that won’t be the case at the state level, meaning the rental car businesses “are going to face a serious cash flow issue because, all of a sudden, they have this surprise liability in Florida that they’re going to have to pay in cash money to the Florida Department of Revenue,” Steven Hogan, a partner in the Tallahassee law firm Ausley McMullen, told the department during one of its tax reform hearings, according to the transcripts.

Hogan did not reveal during the meeting if he was representing a particular client at the time. Reached by phone and asked whether he represented anyone in the rental-car industry, Hogan responded, “I can’t say” and hung up. Court records show Avis Budget has been an Ausley McMullen client in the past.

Separately, Parsippany, N.J.-based Avis Budget is lobbying for a bill moving through the Legislature this spring (SB 878) that would single out vehicle-rental companies and allow them to claim full bonus depreciation on their Florida tax returns. Avis’ tax director, Juliette Peros, testified in support of the bill at a Senate hearing in Tallahassee last week. The bill’s sponsor is Sen. Joe Gruters, a Sarasota Republican who is also the chairman of the Republican Party of Florida. Emails obtained by Florida Trend show that Avis lobbyists have helped write the legislation and have sent Gruters prepared remarks and talking points to explain and defend it. 

Avis says it has more than 73,000 vehicles in Florida and that it generally sells cars after one year of use. Losing the ability to defer taxes on those sales – without getting the offsetting bonus depreciation break – would lead to a much higher Florida tax bill, the company says, though it would not say by how much. “Our tax burden will significantly and astronomically increase,” the company said in an emailed response to questions.

Avis, which earned a $165 million profit last year on revenue of $9.1 billion, declined to answer whether it has saved or expects to save money overall under the federal tax reform legislation. “Taxes should be predictable,” the company said. 

Other rental car companies are being more circumspect about the Florida legislation; a spokeswoman for Hertz, for instance, says the company is neutral on the legislation.

The Department of Revenue estimates that the elimination of the like-kind exchange tax break would raise an estimated $9 million for Florida this year, primarily from rental-car companies. But the agency’s new secretary, Jim Zingale, told Florida Trend recently that estimate appears to be too low, based on actual tax payments that are now coming in from the industry.

Altogether, the department estimates that seven of the largest base-broadening measures in the federal tax bill could cumulatively increase Florida’s corporate income tax revenue by $489 million in 2019, should the Legislature choose to follow the federal tax code on those provisions. The agency also estimates that the bonus depreciation provision will reduce the state’s tax revenue by $231 million if lawmakers choose not to decouple from it.

Lawmakers may be reluctant to forego a substantial amount of revenue at a time when Florida’s finances are stretched thin. Sen. Rob Bradley, a Clay County Republican who chairs the Senate Appropriations Committee, told reporters recently that Florida has already been forced to spend “a lot of our reserves” on Hurricane Michael recovery efforts and that “it’s going to be a very tight budget year.” At the same time, Florida Gov. Ron DeSantis wants the Legislature to find an extra $625 million to pay for water-quality improvements and Everglades restoration, a request that Senate President Bill Galvano, a Bradenton Republican, warned was “pushing it.”

Meanwhile, a report by the Tax Foundation, a right-leaning think tank in Washington, suggests states use the additional revenue created by the federal base broadening as a cushion while they make their own reforms. “It allows them to make their tax codes more neutral and pro-growth while ensuring that a broader percentage of taxpayers are held harmless or made better off due to reform. Enactment of the TCJA (Tax Cut and Jobs Act) provides a golden opportunity for states ready to act on tax reform.”

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