Question

1. Federal taxable income is the common starting point for States when calculating State taxable income. Reflect on this and discuss if you think this is a good idea, or if States would be better served having their own Calculation from the outset.

2. There is a wide variety of specific tax additions and subtractions among the States. Do you think this is ultimately a good thing for States? What about for businesses? Should States consider the impact on businesses when developing their fiscal budgets and tax policies to fund those budgets?

Answer 1

Part 1 . Federal taxable income is the common starting point for States when calculating State taxable income

Talking about The United States, it has a multi-tiered income tax system under which taxes are imposed by federal, state, and sometimes local governments. Federal and state income taxes are similar and a bit different in certain ways such as the type of income one has and the the type of income which is taxable. The taxes are applied as a certain percentage of the income of an individual. The net income therefore, might differ , as these taxes alow deductions and also credits to an individual's income.

• The federal government and the majority of states have income taxes, but their rules and rates can vary widely.
• State taxes differ from one state to another, and these taxes are sometimmes flat rate and some may have progressive rate system.
• State government revenue comes from income, sales, and other taxes; charges and fees; and transfers from the federal government.
• Federal tax reform has implications for state revenue beyond any broader economic effects of tax reform, because the provisions of the new federal tax law flows through to states, most states will experience a revenue increase. Now, most of the tax payers will receive a tax cut at the federal level, but they could easily see a state tax increase unless states act to prevent one.
• The revenue increases will be in states which conform to the federal exemptions, either directly or by linking their own personal exemptions to the number of exemptions claimed at the federal level. States which conform to both the standard deduction and the personal exemption will also experience a revenue increase

States will have to work in conformation with the federal laws in order to increase their revenue. The states although have their own tax regime whch may be progressive for some, but federal laws plays an important role while calculating revenues.

Part 2 There is a wide variety of specific tax additions and subtractions among the States

As stated earlier, state government revenue comes from income, sales, and other taxes; charges and fees; and transfers from the federal government.

State income taxes can vary considerably from one state to another. Some have no income tax at all , some tax only interest income and dividends and some have fat rates.There are specific additions and subtractions in the state taxes such as :

• Net operating losses deduction or NOL
• Dividend received deductions
• Depreciation
• Charitable contributions
• Interest incomes (federal and state)
• Federal income taxes
• Adjustments (other)
• Local taxes on incomes.  T

The impact on businesses

Businesses fall into two categories:

1. Corporations, which pay the corporate income tax,
2. Others: Such as partnerships, corporations, LLCs, and sole proprietorships, which pass their income through to their owner’s income tax returns and pay the ordinary individual income tax.

Corporation profits are subject to the corporate income tax, and then their shareholders are subject to dividend or capital gains taxation when those individuals receive dividends or sell their shares. The profits of pass-through entities – which include small corporations, LLCs (limited liability companies) are subject to the personal income tax: their profits ‘pass through’ to the owners who are then taxed at the personal rate.

Firms respond substantially to changes in state taxation. Corporations reduce the number of establishments per state as well as the number of employees and the amount of physical capital per plant when state-level corporate tax rates increase. Pass-through entities respond similarly to changes in state-level personal tax rates, although by a somewhat smaller magnitude.

State budgets impacts, buisnesses at large , be it small or a big corporations.