States, families, and businesses will face major financial and economic upheaval if the U.S. Congress allows the 2017 Tax Cuts and Jobs Act (TCJA) to expire at the end of this year, according to a new report released Thursday by National Taxpayers Union Foundation.
From a tax hike on 80% of U.S. families, to the loss of pro-growth business provisions, to automatic reversion to pre-TCJA law leading to massive confusion, the effects will cascade through the tax codes of all 50 states and Washington, D.C.
Joseph Bishop-Henchman, Executive Vice President of National Taxpayers Union Foundation and lead author of the report, said state policy makers should prepare now to mitigate impact if Congress fails to act by the end of 2025.
“The most obvious impact is higher tax bills for families, but there are further automatic tax base changes, elimination of pro-growth business investment policies, and huge compliance headaches if the 2017 tax cuts expire,” Bishop-Henchman said. “State lawmakers have control over their own state tax codes and should consider shielding their constituents from some of the fallout.”
States with the Most to Lose
Though the effects of expiration would impact every state, the amount of average tax increase per filer, automatic state conformity to the federal tax code, loss of pro-growth business provisions like equipment expensing and pass through allowances, plus international business tax hikes, and increased state death tax mean some states have more to lose than others.
The 10 states that would be most affected by TCJA expiration are:
“These states are especially vulnerable because their tax codes are tied directly to federal law, so expiration would ultimately shrink their revenue. Their taxpayers would face hefty new tax bills, while dealing with heavy compliance burdens just to stay on the right side of the law,” Bishop-Henchman said.
TCJA expiration would reduce wages by 0.5%, and reduce economic growth by 1.1% over ten years. The reduction in wages and economic activity would also reduce state income, business, and sales tax collections in future years, according to the report.
At the federal level, the expiration of the 2017 TCJA means individual and business taxes would rise by $500 billion annually by halving the federal standard deduction, reducing the federal child tax credit, reintroducing higher federal tax brackets, lowering the federal estate tax threshold, and eliminating key business tax benefits like federal Section 199A and full equipment expensing.
“It’s clear the consequences of failure to pass tax reform this year are too great to ignore,” Bishop-Henchman said. “Families, businesses, and state governments need certainty to plan for the future and help avoid a national recession caused by a massive tax increase.”
Read the report.