GILTI and firm tariff discount

Today, the members of Nebraska Unicameral will debate a bill (LB432 with amendment AM774) of the Revenue Committee that, among other things, excludes global intangible low-taxed income (GILTI) from taxation and lowers the highest marginal corporate tax rate in the state by almost one percentage point. These two tax changes would improve the state’s economic competitiveness and are among the top personal income tax modernization priorities that Nebraska politicians should consider.

Nebraska currently underperforms on our State Business Tax Climate Index, which ranks states based on the competitiveness of their tax structures. The exclusion of GILTI from taxation and the lowering of the upper marginal tax rate to 6.84 percent would put Nebraska in the middle, from 32nd to 24th in corporate taxes and from 28th to 25th overall.

Currently, Nebraska is one of only 12 states plus the District of Columbia that includes 50 percent or more of GILTI in its corporate tax base. The other nine indicate that GILTI taxes a lower proportion (between 5 percent and 30 percent), as shown in the following map:

In the past year, three states – including one of Nebraska’s neighbors – either lowered or eliminated their taxes on GILTI. Iowa exempted GILTI from taxation in 2020 (retroactive to early 2019), followed by Alabama in February 2021 (including limited retrospective relief). In March 2021, Utah passed a bill reducing the state’s GILTI uptake from 100 percent to 50 percent, including retrospectively. Many other states had already excluded GILTI before last year.

LB432, as amended, would remove GILTI from Nebraska’s tax base by receiving 100 percent state dividends received (DRD) from January 1, 2022. This would improve Nebraska’s competitiveness regionally and nationally, especially since most of Nebraska’s regional competitors in the Midwest are not taxed by GILTI.

While the Revenue Committee’s amendment to the bill would not provide the retrospective discharge from GILTI that was included in a similar GILTI Exclusion Act, it would in future exclude GILTI from the tax base, making Nebraska tax legislation less burdensome for multinational corporations and the the possibility of a legal challenge.

This is especially important to policy makers as GILTI’s taxation was never specifically approved by Unicameral but was a by-product of the creation of a new category of taxable international income at the federal level. After the Tax Cuts and Jobs Act (TCJA) was passed in late 2017, many states issued guidelines stating that their existing DRDs apply to GILTI, but the Nebraska Department of Revenue issued guidelines in 2019 stating that GILTI was not considered foreign Dividend does and does not qualify for the DRD. This interpretation came as a surprise to many politicians in Nebraska.

Additionally, Nebraska breaks up GILTI by including only taxable national GILTIs in its denominator, increasing the state’s share of total GILTIs. This puts GILTI at a disadvantage compared to other forms of income and could therefore be seen as a violation of the Dormant Commerce Clause of the US Constitution, which prohibits states from discriminating between states or international trade.

Beyond excluding GILTI from taxation, lowering the corporate tax rate from 7.81 to 6.84 percent, as this law does, would be a step in the right direction to create a more growth-friendly tax environment. Nebraska’s current top tax rate of 7.81 is high at both regional and national levels. Only 14 states and the District of Columbia have top corporate tax rates higher than that of Nebraska, and two of its neighbors – South Dakota and Wyoming – have no income tax at all.

Compared to other major taxes, corporate tax is one of the most economically damaging taxes that states levy because while corporations are legally responsible for paying the tax, the economic impact of corporate tax on a company’s shareholders, workers and consumers falls in the form of lower ones Investment returns, lower wages and higher prices. Additionally, high corporate tax rates like the one in Nebraska can create a “sticker shock” and scare off potential investors.

It is worth noting that while a proposed lowering of the corporate tax rate to 6.84 percent is being discussed in order to achieve parity with the highest marginal individual income tax rate – since transit companies pay taxes according to the individual income tax law – but the tariff parity in and of itself only has a light weight. By default, individual and corporate income tax bases differ in many ways. Even if the maximum rates match, the effective rates will continue to vary from company to company. Another factor that makes true parity difficult is the fact that corporate income is taxed twice – once at the company level and again at the shareholder level – while passed corporate profits are taxed not at the company level but on the owners’ individual income tax returns. This cut would therefore not bring full parity.

Nonetheless, both corporate and individual income taxes are high in Nebraska, as are the state’s corporate and individual income tax levies per capita. Reducing reliance on these taxes – while removing GILTI from the tax base – would help make Nebraska more competitive in the future.

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