Source:
Tax Foundation review of state statutes.
24 States Should Provide Further Guidance to Taxpayers
Consequently, there are 24 states that do not recognize same-sex marriage but
do require state taxpayers to reference their federal tax return when preparing
their state tax return. These 24 states—Arizona, Colorado, Georgia, Hawaii,
Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Missouri,
Montana, Nebraska, North Dakota, Ohio, Oklahoma, Oregon, South Carolina, Utah,
Virginia, West Virginia, and Wisconsin—must provide guidance to taxpayers on how
to proceed before the 2014 tax season.
In these states, same-sex couples will file single returns at the state level
but joint returns at the federal level. State law generally requires references
to the federal return and filing status to match the federal return, which will
be impossible. Assuming a state does not opt to recognize same-sex marriage by
next year, states have several options for providing guidance to resolve this
conflict:
- Permit taxpayers facing a federal-state filing status conflict to
reference a gdummyh federal return. To resolve this with minimal impact
to the state, taxpayers in this situation would be instructed to prepare a
gdummyh federal return reflecting single filing and reference that when
preparing the state return. Taxpayers who file married filing separately at
the federal level would be permitted to file as single at the state level.
Most taxpayers will be unaffected by this change, and while some same-sex
taxpayers may face additional compliance costs, they will get the benefits of
joint federal filing.
- Permit taxpayers facing a federal-state filing status conflict to
gsplith their joint federal return. Alternatively, this option also
leaves most taxpayers unaffected while reducing the compliance costs for
same-sex taxpayers. Under this option, taxpayers in this situation will be
instructed that any reference to the federal tax return will be interpreted to
mean half the amount on the filed joint federal return. For example, if the
couple reports $50,000 in income on their joint federal return, each
individual will report $25,000 in income on each state return. Depending on
income disparity, this may have uneven effects on certain same-sex taxpayers,
but would reduce compliance costs.
- Create a new gfederal joint returnh filing status when a taxpayer
files a federal joint return but cannot do so at the state level under state
law. Presently, taxpayers may file as single, as married filing jointly,
as married filing separately, or as head of household. This option would
create a new gfederal joint returnh status for couples who file married filing
jointly or married filing separately at the federal level but are not
permitted to do so at the state level under state law. Taxpayers would
reference their federal return when preparing their state return, but the
state would not recognize same-sex marriage. This option may be most ideal for
states such as Colorado, Hawaii, and Illinois, which recognize civil unions
but not same-sex marriage.
Depending on state law, this guidance may require only an administrative
ruling by revenue officials. Alternatively, governors and legislators can enact
changes legislatively.
States Should Resist Calls to Decouple from Federal Tax
Law
Officials in these 24 states may face calls for the state to gdelink,h or
gdecouple,h from the federal tax code to eliminate the need to clarify what
same-sex couples filing jointly at the federal level should reference when
preparing their state tax return. At first glance, this may seem a viable
solution, since deleting all state references to the federal tax code eliminates
all need to refer to the federal tax return. However, decoupling would impose
new compliance costs on all state taxpayers.
Decoupling Would Impose Compliance Costs on All Taxpayers
A principle of sound tax policy is that tax systems should be as simple as
possible because the cost of complying with complex tax systems is a real
economic loss that distorts incentives and economic behavior. Decoupling
violates this principle because it requires taxpayers to calculate income,
exemptions, deductions, and credits with two conflicting accounting and tax
systems. Taxpayers would need to keep two sets of books: one for federal law and
one for each decoupled state with unique definitions and rules. This essentially
doubles the cost of complying with the income tax, which would likely harm
investment, job creation, and long-term tax revenues.
Taxpayers consistently complain about the complexity of the tax code, for
good reason: in 2005, the estimated time and money cost of complying with the
federal income tax code was 6 billion man-hours worth $265 billion. The code
that year stood at 7 million words in 736 code sections, up from 718,000 words
in 103 code sections in 1955. Decoupling makes this worse, by increasing both
the cost of compliance for taxpayers and the cost of administration to revenue
officials who track and enforce the code.
Decoupling Sends the Signal that the State is Unfriendly to Business and
Investment
The extent to which a state welcomes business owners and entrepreneurs making
decisions about where to locate investment capital, equipment, and jobs depends
on a number of factors that the Tax Foundation attempts to gauge in our annual
State Business Tax Climate Index. States can be termed gunfriendlyh if
they consistently move the state tax system away from a sound tax policy, such
as with increased complexity, retroactivity, high burdens, economic distortions,
and a lack of transparency.
Decoupling is a move away from sound tax policy, because it increases tax
burdens, reduces stability, and exacerbates an already complex income tax code.
Individuals and businesses should be wary of states that have decoupled, since
it signals that the state cares more about parochial definitions and rules
instead of long-term economic growth. While remaining coupled or recoupling is
not in itself a signal of welcoming new investment, it signals a commitment to
principled tax policy.
Conclusion
The concept of physical presence is tightly connected to tax and spending
policy. Taxpayers pay income taxes, sales taxes, property taxes, and other taxes
based on where they are when assessed, and taxpayers receive benefits based on
which state they live in. The rise of swift transportation, instantaneous
communication, and an interconnected world continue to challenge these deeply
rooted historical standards. Using a gstate of celebrationh standard may be more
realistic and more accurate, but it will present challenges in compliance and
enforcement that would not occur under a gstate of residenceh standard. However,
states have viable options for accommodating this federal change with minimal
effort that would affect only a few taxpayers. States should resist calls to
decouple, which would involve enormous costs for all taxpayers.
[1] U.S. Department
of the Treasury, All Legal Same-Sex Marriages Will Be Recognized for Federal
Tax Purposes, Aug. 29, 2013, http://www.treasury.gov/press-center/press-releases/Pages/jl2153.aspx.
[2] United
States v. Windsor, 570 U.S. ____, Docket No. 12-307 (Jun. 26, 2013).
[3] See
U.S. Const. art IV, sec. 1 (g[T]he Congress may by general Laws prescribe
the Manner in which such Acts, Records and Proceedings shall be proved, and the
Effect thereof.h).
[4] For information
on how the tax code offers marriage bonuses and marriage penalties for different
categories of taxpayers, see Nick Kasprak, Effects of Marriage on Tax Burden
Vary Greatly with Income Level, Equality, Tax Foundation Fiscal Fact No.
352 (Jan. 10, 2013), http://taxfoundation.org/article/effects-marriage-tax-burden-vary-greatly-income-level-equality.