[co-author: Karen R. Miller]*
This was a question often raised during the annual Council On State Taxation (COST)/Tax Leadership Roundtable Southeast Regional SALT Update held earlier this month at the Encompass Health headquarters in Birmingham. The conference was co-sponsored by Bradley and Grant Thornton LLP and included a panel discussion chaired by long-time Commissioner of Revenue and FTA President Vernon Barnett. To even begin to answer that question, we first must revisit the landmark Tax Cuts and Jobs Act of 2017 (TCJA), which among other things drastically reduced the top federal corporate income tax rate from 35% to 21%, increased certain individual tax credits while reducing personal income tax rates, imposed limitations on business interest deductions, imposed the now infamous “SALT Cap” and made a myriad of other domestic and international tax changes. Most of those changes were scheduled to automatically sunset on December 31, 2025. If Congress hadn’t acted, we would have seen a massive ($4 trillion plus) tax increase at the federal level, plus relatively smaller tax increases at the state level.
Although revenue estimates vary widely, the static cost of OBBBA (or OB3) is predicted to range from $1.4 trillion to $3.4 trillion over the next 10 years. This is largely driven by increased bonus depreciation and first year write-offs for business assets, including the temporary ability to immediately write off the cost of certain manufacturing facilities constructed in the U.S.; immediate expensing of R&D; increased business interest deductions; the continuance of certain tax benefits relating to pass-through entities, including an increased SALT Cap; and new deductions for overtime pay and tips, among several other business and individual tax breaks.
At the same time, as a partial pay-for, OB3 enacted changes to the Medicaid and SNAP (food assistance) programs that likely will increase state costs by millions of dollars annually due to reduced federal funding.
Some states are already responding. For example, the governor of Colorado has called their Legislature into special session this month to address what he predicts is a $1.2 billion revenue loss caused by that state’s automatic conformity with many aspects of OB3. Several other states are expected to go into special session this Fall to address the conundrum.
Like Colorado, Louisiana and Tennessee, and the other “rolling conformity” states, Alabama adopts federal corporate income tax changes automatically -- even the retroactive effective dates of several of the key business tax provisions -- while our individual income tax code provides what can be termed “piecemeal” automatic conformity, tied to the cross-reference in our statutes to particular IRC sections. For example, Alabama doesn’t recognize the now permanent IRC Section 199A qualified business deduction for PTEs and their owners, because our statutes don’t contain that cross-reference. Conversely, in 2021, the Alabama Legislature voted to decouple our corporate income tax code from several of the complex foreign tax changes in TCJA, commonly known as GILTI and BEAT.
States with fixed IRC conformity dates (e.g., cross-referencing to the IRC as in effect on 1/1/24), such as Georgia, South Carolina, North Carolina and Texas, must soon decide which OB3 changes to adopt. We would expect the business communities in those states to lobby for conformity with the “Big 3” tax benefits: bonus depreciation, IRC Section 179 expensing, and R&D expensing.
The Alabama Legislature is not slated to convene again until January 13, 2026, unless Gov. Kay Ivey calls a special session. Next year is also an election year and decoupling from any of the most popular business tax benefits could be seen by some as a “tax increase” due to our automatic conformity with those federal changes and their retroactive effective dates.
We are pleased to see the Alabama Department of Revenue under the leadership of Commissioner Barnett taking a lead role, along with the Legislative Services Agency (LSA), to help discern the fiscal and economic impacts of OB3. Practitioners and leaders of the business community have also offered assistance while seeking guidance from the Department of Revenue initially as to those tax changes that became effective this year and will therefore impact 2025 tax return quarterly and annual filings. ASCPA President and CEO Jeannine Birmingham added that “the State Society is committed to working closely with legislative leadership, the Department of Revenue, LSA, and the business community in determining which tax changes enacted by OBBBA should become a part of the Alabama income tax code.”
*University of Alabama Culverhouse School of Accountancy
