States Should Reject Corporate Demands for “Deferred Tax” Deductions

Updated May 23, 2019

States Should Reject Corporate Demands for “Deferred

Tax” Deductions

By Michael Mazerov

In an increasing number of states, lobbyists for large multistate corporations have been pushing

for the enactment of a new tax break they call “deferred tax relief.” They have primarily been trying

to attach this tax break — a new deduction from gross income — to an important loophole-closing

measure that often increases corporations’ state income tax payments. This tax giveaway is unusual

in that it would eventually cause states to forgo real revenue needed to fund education, health care,

public safety, road maintenance, and other critical services and infrastructure to offset a “paper”

expense that some corporations must report on their financial statements. Corporate lobbyists have

succeeded in passing this tax break in six states though it has not yet led to revenue losses in any of

them because the effective dates have been delayed.

Proponents of deferred tax deductions cite a faulty claim that shareholders of publicly traded

corporations unfairly suffer a “double impact” from state corporate tax increases. The first adverse

impact is the actual reduction in after-tax profits of the company; the second is an alleged reduction

in stock value resulting from a one-time increase in income tax expense reported on corporate

financial statements. But the second claim is both implausible and unsupported to date by any

empirical evidence. Moreover, federal policymakers have never granted such a tax break even

though federal corporate tax changes can have analogous and much larger impacts on the amount of

tax expense reported on financial statements.

Although corporations have made proposals for deferred tax deductions more palatable to state

lawmakers by including delayed effective dates and spreading the deduction over multiple tax years,

there is no guarantee these concessions will continue. Enacting this tax break sets a dangerous

precedent; future legislatures would be hard-pressed to justify not attaching it to any measure that

increases the corporate tax liability of even a handful of companies — perhaps with much more

immediate and serious revenue impacts. Deferred tax deductions are unwarranted. No additional

states should grant them, and the states that have already enacted them should repeal them.

What Is the “Deferred Tax” Tax Break?

When a change in federal or state tax law increases the actual (or “effective”) rate at which

corporate profits are taxed, Generally Accepted Accounting Principles (GAAP) may require a

corporation to report on its financial statements a one-time increase in its income tax expense in

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addition to the ongoing increase in its actual tax liability.

One of the most common reasons such an

adjustment would be necessary is that the corporation has a significant “deferred tax liability” on its

balance sheet. This liability often results from the fact that corporate managers usually calculate the

income tax expense reported on their financial statements as if they were writing off (“depreciating”)

their plant and equipment investments evenly over time, while calculating their actual tax liability

using “accelerated depreciation.” Accelerated depreciation allows them to “bunch” depreciation

deductions in the early years after the asset is purchased.

This divergence between “book” and “tax” depreciation requires reporting a “deferred tax

liability” on the corporate balance sheet to reflect that the upfront bunching of the depreciation

deductions for tax purposes means that the corporation will actually have a greater tax liability in the

future than the financial statements would otherwise imply.

GAAP requires any deferred tax liability

on the corporation’s books to be re-valued upward when the effective income tax rate of the

corporation increases for any reason — including a change in state or federal tax law. This, in turn,

results in a one-time increase in financial statement income tax expense.

This one-time increase in tax expense is an “on paper” accounting adjustment. Nonetheless, corporations and

their trade associations have successfully lobbied lawmakers in six states to enact a new tax

deduction to offset it. The deduction is equal to the amount by which net deferred tax liability has

risen as the result of an increase in the corporation’s effective tax rate. In five states — Connecticut,

the District of Columbia, Massachusetts, New Jersey, and New Mexico — the deduction was

attached to legislation implementing corporate tax reform known as “combined reporting.”

In the

sixth, Kentucky, the deferred tax relief deduction was enacted a year after combined reporting was

approved.

In all six states, the ability to begin claiming the deduction was delayed for at least four years (in

Connecticut, the District of Columbia, and Massachusetts, subsequent legislation pushed it back

Deferred tax deductions are also frequently referred to as “ASC 740” deductions, because Accounting Standards

Codification No. 740 is where GAAP rules covering corporate income tax accounting are currently set forth. Older

discussions of deferred tax deduction proposals in the states often referred to it as “FAS 109” deductions, because at the

time Financial Accounting Standard 109 stated GAAP rules for income tax accounting.

For a simplified example of how this arises, see Joint Committee on Taxation, “Present Law and Background Relating

to the Interaction of Federal Income Tax Rules and Financial Accounting Rules” (JCX-12-12), February 7, 2012, pp. 17-

18, https://www.jct.gov/publications.html?func=showdown&id=4395.

Corporations with net deferred tax assets (such as operating loss carryforwards) on their balance sheets may have to

report a one-time increase in tax expense when their effective income tax rate drops due to a change in tax law.

Combined reporting treats a parent corporation and some or all its subsidiaries as a single corporation for tax purposes,

nullifying a variety of techniques corporations have devised to shift income onto the books of subsidiaries located in

low- or no-tax states. When a state switches to combined reporting from “separate entity” taxation (which treats the

parent and subsidiaries as separate corporations for tax purposes), corporations employing these income-shifting

strategies may experience a higher effective tax rate in that state — necessitating the upward restatement of deferred tax

liability. See Michael Mazerov, “State Corporate Tax Shelters and the Need for ‘Combined Reporting,’” Center on

Budget and Policy Priorities, October 26, 2007, https://www.cbpp.org/research/state-corporate-tax-shelters-and-the-

need-for-combined-reporting. Twelve states plus the District of Columbia have enacted combined reporting since 2008,

and the total number of states that have enacted this policy now stands at 29 (including D.C.).

further), and the deduction itself has to be spread out anywhere from seven to 30 years. The

deduction can be claimed beginning in tax year 2020 in the District, and 2021 in Connecticut and

Massachusetts and beyond that in the other three states, so no actual revenue losses have occurred

yet. Only publicly traded corporations can claim the deduction, and in several of the states they must

disclose to the revenue department in the first year after the deduction is enacted how much they

ultimately will claim once they’re allowed to start doing so.

Adverse “Double Impact” of Corporate Tax Increases on Stockholders Is

Implausible

Deferred tax deductions would eventually rebate real dollars to eligible corporations to offset the

impact of combined reporting (and potentially other changes in state corporate tax policy)

on how

much profit they report on paper to their stockholders and the public. The “double-impact”

justification for the tax break effectively posits that stock market participants are incapable of

distinguishing between the effect of the tax change on the amount of profit retained by the

corporation after paying its state corporate income tax and the effect on the corporation’s financial

statement profit. But there are scores of skilled, highly compensated stock market analysts whose job

is to do precisely that: to make adjustments for the many arbitrary line-drawings entailed in

preparing financial statements under GAAP and thereby develop a more accurate picture of a

corporation’s recent and likely future economic performance. Some individual investors may not

have access to this kind of sophisticated analysis, but institutional investors certainly do, and their

buying and selling activity in the stock market drives stock pricing.

The claim that corporations’ stock valuations are harmed if they report an increase in financial

statement tax expense due to state corporate tax increases is even less plausible when one considers

the magnitudes likely to be involved. Take, for example, NextEra Energy, a corporation that has

A bill to create a deferred tax deduction in response to a different change in state tax law — a switch to “single sales

factor apportionment” — was proposed in Maryland in 2019 but was not approved. Changing from the traditional

property/payroll/sales apportionment formula to single sales factor apportionment can also increase the effective

income tax rate for out-of-state corporations that have substantial sales but relatively little property or staff in the state.

See Michael Mazerov, “The ‘Single Sales Factor’ Formula for State Corporate Taxes: A Boon to Economic

Development or a Costly Giveaway?” Center on Budget and Policy Priorities, revised September 1, 2005,

http://www.cbpp.org/3-27-01sfp.pdf.

A deferred tax deduction was enacted in 2007 when Michigan repealed its Single Business Tax and substituted the

Michigan Business Tax (MBT), a dual tax on business profits and gross receipts. The latter tax was repealed in 2011 in

favor of a conventional corporate profits tax, before the deferred tax deduction attached to the MBT could be claimed.

The business community lobbied unsuccessfully to have a deferred tax deduction included in the new corporate profits

tax. See Council On State Taxation letter to Governor Rick Snyder and legislative leadership, “In Support of FAS 109

Relief in House Bill 4362,” April 28, 2011, https://cost.org/globalassets/cost/state-tax-resources-pdf-pages/cost-

comments-and-testimony/letter-re-need-for-fas-109-relief-in-mi-hb-4362.pdf.

A recent study, discussed below in the body of this report, observes that “SEC Regulation S-X requires firms to

disclose material items that explain the difference between tax at the statutory rate and total tax expense [reported on

financial statements]. Thus, we expect [professional stock] analysts and investors can identify nonrecurring income taxes

and adjust for them. For example, motivated users of financial [statement] information should be able to understand that

nonrecurring income taxes generated by rate changes do not persist. . . .” Dain C. Donelson, Colin Q. Koutney, and

Lillian F. Mills, “Nonrecurring Income Taxes,” unpublished, April 2018, pp. 12-13,

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2720464 (hereafter, “Donelson”).

taken a leading role in pushing for this tax break nationally.

In a fact sheet recently circulated in

New Mexico and in testimony recently delivered in Maryland, the company stated that the

adjustment to its deferred tax accounts that would result from New Mexico’s adoption of combined

reporting and that did result from Maryland’s adoption of a “single sales factor” apportionment

formula would lead to additional financial statement tax expense in the “millions of dollars.”

Yet

NextEra reported $4.3 billion in profit from current operations nationally in 2018.

Given that

NextEra’s current stock value is driven overwhelming by its future earnings prospects, which in turn

depend on such factors as future domestic economic growth, world energy market conditions,

technological developments affecting the cost of producing and storing wind and solar energy, and a

host of other factors, an additional one-time financial statement expense in the “millions of dollars”

likely would have no discernible impact on the stock value of a company this large.

Rather than being motivated by concerns about an adverse impact on stockholders, it seems far

more likely that the push for deferred tax breaks are driven by the desire by corporate managers to

maximize their own compensation. As accounting professor Lillian F. Mills has noted: “[M]anager

bonuses . . . are frequently based on reported book income and balance sheet amounts.”

Deferred Tax Deduction Advocates Haven’t Provided Any Empirical Evidence

of Adverse Stock Price Effects

Half the states that have switched from separate-entity corporate taxation to combined reporting

in roughly the last decade have done so without attaching a deferred tax deduction. Some two dozen

states have switched during the past 20 years to a single sales factor apportionment formula for

multistate corporations; none of the states making this change in corporate tax policy attached

deferred tax deductions to the legislation.

If the claim that upward revaluations of deferred tax liabilities had a distinct adverse impact on

stock market values were true, surely these shifts in tax policy would have provided evidence that

In addition to testifying in support of 2019 Maryland legislation proposing a deferred tax deduction (see Note 5), a

NextEra representative made the case for the policy at two consecutive meetings of the National Conference of State

Legislatures (NCSL) Task Force on State and Local Taxation in August and November 2016. See Angela Pitale (NextEra

Energy Resources) and Stephen Kranz (McDermott Will & Emery), “Financial Reporting: Publicly Traded Companies

(and why it matters for state tax policy),” http://www.ncsl.org/documents/taskforces/Financial_Reporting.pdf.

NextEra staff appear to have authored a one-page document circulated in New Mexico in early 2019 making the case for

the inclusion of a deferred tax deduction in legislation mandating combined reporting. The document is titled “What is

deferred tax relief and why is it necessary?” and states that “For NextEra, this is an immediate impact of millions of

dollars.”

For New Mexico, see the unattributed one-page document described in the previous note. For Maryland, see the video

recording of the hearing on Senate Bill 458 held on February 26, 2019,

http://mgahouse.maryland.gov/mga/play/dd7e655b-301f-4143-816c-8d9394e2deed/?catalog/03e481c7-8a42-4438-

a7da-93ff74bdaa4c&playfrom=2535000.

See NextEra Annual Report to the Securities and Exchange Commission (Form 10-K) for the 2018 tax year,

https://www.sec.gov/Archives/edgar/data/37634/000075330819000039/nee-12312018x10k.htm.

Lillian F. Mills, “Five Things Economists and Lawyers Can Learn from Accountants: An Illustration Using the

Domestic Production Activities Deduction,” National Tax Journal, September 2006.

See Note 5.

proponents of deferred tax deductions would be citing. But no such evidence has been offered.

Moreover, although NextEra Energy testified that it had to report an immediate additional tax

expense in the “millions of dollars” after Maryland adopted a single sales factor apportionment

formula in 2018, the company offered no evidence that that expense negatively affected its stock

value.

Academic Research Doesn’t Support Claims of Adverse Stock Price Effects

Nor does recent academic research support the claim that a one-time increase in financial

statement income tax expense is likely to independently affect the price of the corporation’s stock. A

2018 University of Texas study used sophisticated statistical techniques to evaluate how both Wall

Street stock analysts and investors react to one-time — “nonrecurring” — changes in financial

statement tax expense.

In addition to tax law changes requiring revaluation of deferred tax

liabilities (and deferred tax assets), the study included such discrete changes as the settlement of tax

audit disputes and the occasional “repatriation” of profits held in U.S. subsidiaries back to U.S.

parent corporations. (The latter two changes affect actual corporate tax payments, but, like the

upward revaluation of deferred tax liabilities, they are one-time or random events that don’t reflect

corporations’ long-term income trends.)

The study concluded that professional stock analysts generally ignored one-time events affecting

financial statement tax expense when they issued their forecasts of corporate earnings.

important, it found that these events did not have a significant impact on stock prices.

One of the

explanations for both findings is that corporate managers themselves rarely (only 10 percent of the

time) include one-time tax expense effects (increases or decreases) in the quarterly earnings reports

they issue. Securities and Exchange Commission rules permit corporate managers to present their

quarterly earnings on a non-GAAP basis if they believe they are a better reflection of the

corporation’s actual performance, provided they explain any discrepancy. Managers frequently issue

such reports.

The study found that “investors seem to ignore nonrecurring income taxes regardless

of whether managers include or exclude the [transitory tax] item in their calculation of non-GAAP

earnings.”

That is, such items do not have a significant impact on stock prices.

Turning to current, real-world implications of the study, the authors observed:

See the second source cited in Note 8.

Donelson, 2018.

“Consistent with low persistence, analysts generally exclude nonrecurring income taxes from their Street earnings

[forecasts].” Donelson, p. 5.

“[W]e do not find a statistically significant association between nonrecurring income taxes and earnings

announcement returns, consistent with investors interpreting nonrecurring income taxes as transitory to future

earnings.” Mills, p. 26. “Overall, we find little investor reaction to nonrecurring income taxes. Thus, investors do not

appear to misprice nonrecurring income taxes.” Donelson, p. 27.

“Most managers now issue non-GAAP earnings, which are GAAP earnings after removing earnings items that

managers deem less informative for stock valuations, such as transitory items.” Donelson, p. 10.

Donelson, p. 7.

Following . . . enactment [of the 2017 federal tax restructuring bill, the Tax Cuts and Jobs

Act, or TCJA], financial press headlines highlighted the law’s material and immediate impact

on corporate earnings, suggesting confusion about the implications of nonrecurring income

taxes. . . . Our study suggests non-GAAP earnings should be relatively unaffected, and so

nonrecurring tax gains and losses caused by TCJA or other tax events should cause little

concern to analysts and investors.

As the next section discusses, federal tax law changes often have much larger effects on the value

of deferred tax liabilities and assets than state tax law changes do; if the study’s authors expect little

impact of TCJA on stock prices, it is even less likely that a single state’s enactment of something like

mandatory combined reporting would.

Deferred Tax Deductions Haven’t Been Provided in Connection With Federal

Corporate Tax Policy Changes

Federal tax policy changes can result in increased tax expenses on corporate financial statements

identical to — and often many times larger than — those resulting from changes in state tax

policies. Indeed, the 2017 Tax Cuts and Jobs Act reportedly has forced multi-billion-dollar

reductions in reported financial statement profits for some companies — $22 billion in the case of

Citigroup, for example.

Although corporate representatives have lobbied Congress in the past to take financial statement

impacts into account when considering corporate tax policy changes,

CBPP’s federal tax policy

staff and outside experts consulted are unaware of their ever having sought a deduction or similar

tax break that would have resulted in actual revenue losses. Nor are we aware of any official policy

positions of organizations of private-sector federal tax practitioners asserting that corporations are

entitled to such offsets.

Federal tax lobbyists for corporations may perceive that Congress has

Donelson, p. 8.

John Stittle, “Trump’s Tax Cuts Will Play Havoc with Reported Earnings,” Mondaq, April 19, 2018,

http://www.mondaq.com/uk/x/693812/Corporate+Tax/Trumps+Tax+Cuts+Will+Play+Havoc+With+Reported+E

arnings.

Because the Tax Cuts and Jobs Act slashed the effective federal corporate tax rate for most corporations, those with net

deferred tax liabilities will experience a one-time reduction in financial statement tax expense that will boost quarterly

financial statement earnings. An examination of the financial statements of S&P 100 corporations estimated that TCJA

“winner” corporations would experience $200 billion in financial statement income increases and that “losers” would

experience $80 billion in aggregate increased tax expense. See Peter J. Reilly, “Earnings Havoc Unleashed By Tax Act,”

Forbes, December 31, 2017, https://www.forbes.com/sites/peterjreilly/2017/12/31/earnings-havoc-unleashed-by-tax-

act/#2e172d27492f.

For a discussion of how some corporations with large deferred tax assets successfully lobbied for what became the

(recently repealed) Internal Revenue Code Section 199 “domestic production deduction,” see Christopher H. Hanna,

“Corporate Tax Reform: Listening to Corporate America,” Journal of Corporation Law, Winter 2010.

The Tax Executives Institute (TEI), a professional association of in-house corporate tax staff responsible for federal,

state, and local tax compliance, has adopted a policy resolution calling on states to provide deferred tax deductions:

https://www.tei.org/sites/default/files/advocacy_pdfs/2018.02.14%20-%20SALT%20Policy%20-

%20Deferred%20Tax%20Relief%20-%20FINAL.pdf. A search of TEI’s website for policy statements authored by both

its Federal Tax and its Financial Reporting committees revealed no policy statements calling for deferred tax offsets in

connection with federal corporate tax policy changes.

more tax policy staff familiar with financial statement tax accounting than states do and therefore

anticipate a more skeptical reception to proposals for deferred tax offsets that would reduce

revenue.

Governments Don’t Compensate Corporations for Negative Financial

Statement Impacts of Non-Tax Policy Changes

Corporations run numerous risks that real-world conditions will change in ways that will reduce

their profitability. Consumers can decide they prefer a competitor’s products. A flood or fire can

eliminate access to a key production input. A court can rule that a design flaw in their product

harmed customers.

Corporations also run the risk that public policies affecting them will change in adverse ways.

Congress can impose more stringent pollution control requirements. The Federal Reserve can

increase their borrowing costs. If these changes are large enough, they can not only impose direct

costs on the companies but also force them to write down the value of certain assets on their

financial statements. Although direct costs incurred due to such changes (for example, the cost of

additional pollution control equipment) would likely be deductible in calculating income tax liability,

governments don’t compensate the corporations for the secondary financial statement impacts.

There is no good reason why governments should compensate corporations for the financial

statement impacts of tax policy changes, either. It is especially unclear why corporations should be

compensated for the financial statement impact of adopting combined reporting, which often

increases the tax liability of corporations that were engaged in aggressive tax sheltering strategies.

“Transition Rules” for Major Tax Changes Can Sometimes Be Justified, But

That Is Not What Deferred Tax Deductions Represent

A legitimate case can sometimes be made that major tax policy changes justify certain transition

rules to mitigate inequities created when corporations that made investment decisions under one set

of tax rules now confront a different set. Suppose, for example, that a corporation makes a major

facility investment where the depreciation deductions will be so large as to put the company into a

loss situation for several years. The company makes the investment in anticipation of using those

losses in later years, but then the state repeals its corporate income tax and substitutes a gross

receipts tax. In such a situation, a transition rule should perhaps allow the corporation to file

amended returns for previous tax years and deduct the current losses in those earlier years or deduct

them against the gross receipts tax going forward.

But deferred tax deductions are not transition provisions. If they were, they would be made

available immediately (rather than with a multi-year delay) to all corporations that would experience

a higher tax liability due to the switch to combined reporting, single sales factor apportionment, or

similar types of policy changes rather than only to publicly traded corporations with negative

financial statement impacts. As discussed previously, advocates of deferred tax deductions justify

them by claiming that the stockholders of publicly traded corporations alone suffer an adverse

“double impact” from such changes, but deferred tax deductions would create discrimination rather

If the write-down of the value of the assets results in an actual loss when they are sold or abandoned, then that loss

will be deductible at that time.

See the source in Note 4.

than compensate for it. Both publicly traded and privately held corporations could be subject to

higher tax liabilities as a result of the change in tax policy, but only the former would be eligible for

deferred tax deductions that would recoup some of the initial costs.

Attempts to characterize deferred tax deductions as legitimate transition provisions are especially

misleading given the circumstances in which corporations would most likely claim them (if a state’s

law granted them).

As discussed above, the divergence between “book” and “tax” depreciation is

probably the most common reason a corporation would have a deferred tax liability on its balance

sheet. The ability to accelerate depreciation deductions is a valuable tax break that provides a real

economic benefit to the company. Due to the time value of money, the additional taxes saved

upfront are more valuable than the higher taxes paid later when depreciation deductions are lower

than they otherwise would have been. In other words, the ability to claim accelerated depreciation

provides the equivalent of an interest-free loan from the government.

It is true that if a corporation has been permitted to claim accelerated depreciation in a state that

subsequently increases that corporation’s effective tax rate, the value of that benefit falls somewhat

because a higher tax rate now applies to the greater taxable income that will be reported in later

years. Nonetheless, assertions that corporations are entitled to compensation for losing part of the

value of what was a discretionary tax break to begin with seem dubious.

How Much Could a Deferred Tax Deduction Cost?

As previously discussed, all the deferred tax deductions enacted to date have provided for both a

delayed effective date and a multi-year claim period. This puts any actual impact on revenues beyond

the current budget forecasting window in most states and makes the potential annual revenue loss

smaller once the effective date is reached. Delayed effective dates and phase-ins are common tactics

employed by tax cut proponents to make their proposals more palatable to current lawmakers. They

obviate the need for politically unpopular offsetting tax increases or program cuts to be enacted

immediately and make it more difficult for the public and the media to tie lower available funds in

the future to tax policy decisions that were made years earlier.

One state — Massachusetts — required corporations intending to claim the deferred tax

deduction in the future to report the amount to be claimed and, significantly, made the information

public. The state found that 128 publicly traded corporations would have saved $535 million in state

The Council On State Taxation letter cited in Note 5 sought to justify the deduction as a transition provision: “A

deduction to ameliorate the negative consequence of the proposed tax reform on publicly-traded companies’ financial

statements would be, by definition, a temporary provision to address an issue solely related to the transition from one

type of business tax system to another.” The Pitale/Kranz presentation to NCSL cited in Note 7 contains a slide titled

“Relief Provided by Some States -Examples,” which lists states that have provided a deferred tax deduction and those

that have preserved net operating loss carryforwards in transitioning to combined reporting and gross receipts taxation

— eliding the fact that the former were limited to publicly traded corporations while the latter were available to all

affected corporations.

Eric Figueroa, Michael Leachman, and Michael Mazerov, “Phasing in State Tax Cuts Doesn’t Make Them Fiscally

Responsible,” Center on Budget and Policy Priorities, February 6, 2017, https://www.cbpp.org/research/state-budget-

and-tax/phasing-in-state-tax-cuts-doesnt-make-them-fiscally-responsible.

corporate income taxes, or $76 million annually, in the seven-year period over which the deductions

could have been claimed. This potential revenue “rebate” represented nearly one-third of the

anticipated annual revenue gain from enacting combined reporting. Fifty-two percent of the revenue

forgone would have reduced the tax liability of just three corporations, and 88 percent of the

revenue loss would have benefited just 14 of the 128 companies eligible for the break.

In light of

these substantial potential revenue losses, Massachusetts lawmakers have pushed back the effective

date of the deduction numerous times — it now doesn’t take effect until 2021 — and extended the

period over which the deduction may be claimed from seven to 30 years.

The specific corporations whose profits comprise the state corporate tax base vary greatly among

the states, so not every state attaching a deferred tax deduction to combined reporting legislation

might necessarily be at risk of forgoing as much of the revenue gain as Massachusetts. Nonetheless,

the Massachusetts data illustrate how large the revenue losses could be and should give lawmakers

considering enacting such a tax break pause — especially in light of the underlying lack of a solid

policy rationale for the giveaway.

Lawmakers Shouldn’t Count on Corporations’ Expectations Not to Claim

Deferred Tax Deductions

As soon as a state enacts legislation providing for a future deduction equal to the amount by

which a corporation’s deferred tax liability increases due to a specific tax change, GAAP rules allow

the corporation to avoid having to report any additional income tax expense. There have been some

hints that the corporations are seeking only the enactment of such provisions; they don’t care if they

are ever actually able to claim the deductions.

The fact that several states have enacted legislation

postponing the effective date of deferred tax deductions without much evident corporate opposition

is further evidence that the principal objective is simply getting the deduction in statute.

Accordingly, some lawmakers may view the enactment of deferred tax deductions as providing a

benefit to in-state corporations with no ultimate cost in forgone revenue — harmless at worst and

potentially politically beneficial to those who vote for it.

Lawmakers should not view deferred tax deductions as benign, however. First, some

representatives of major multistate corporations likely do intend for the deductions to be claimed

eventually. The Council On State Taxation (COST), the trade association that represents the largest

multistate corporations on state tax policy and legal matters, has adopted an official policy position

stating that “When enacting significant corporate tax law changes, states must mitigate the immediate

“Massachusetts Department of Revenue Report on FAS 109 Tax Deductions,” September 2009.

Massachusetts Department of Revenue, “Tax Changes in the Fiscal Year 2016 Budget,” Technical Information

Release 15-12, October 28, 2015.

For example, the Tax Foundation has observed that “the state can choose to keep extending when it will pay out the

deduction, since what matters to the company is not the money but the deferred tax asset it can put on its books to

offset the liability.” Joseph Bishop-Henchman, “Easing the Kentucky Combined Reporting Transition,” March 19, 2019,

https://taxfoundation.org/kentucky-combined-reporting/.

Corporations have fiercely opposed efforts to repeal enacted deferred tax deductions, however. See, for example, Jon

Chesto, “Beacon Hill Leaders keep corporate tax deduction intact,” Boston Globe, July 17, 2015,

https://www.bostonglobe.com/business/2015/07/17/beacon-hill-leaders-change-their-minds-keep-corporate-tax-

deduction-intact/potEpoqzfis6qJcwN5raKI/story.html .

and negative impact of those changes on a company’s financial reporting.” The statement refers to

states “providing a reasonable schedule to allow the future deduction of the additional expenses triggered

from any book/tax differences.”

In 2011 written testimony in support of a deferred tax deduction

in Michigan, COST defended the provision as “having an implementation date sufficiently far in to

the future to avoid any near-term budgetary impact in the state.”

And a policy statement in support

of deferred tax deductions by another organization of corporate tax practitioners, the Tax

Executives Institute, observes that “States have a great deal of flexibility in the timing of such

deductions such that they can control the impact on the state coffers,”

anticipating an impact at

some future point.

Second, once a deferred tax deduction is on the books, the possibility exists that it will not, in fact,

be extended once the date at which it can be claimed is reached. Lawmakers who expected to

propose extending the effective date once again may no longer be in office at that time, and

corporations could lobby against an extension. At the very least, corporations and other lawmakers

interested in enacting other kinds of corporate tax breaks as the effective date approaches could use

the looming revenue loss as a bargaining chip to extract other, less costly alternatives.

Third, once deferred tax deductions are on the books, lawmakers and advocates who want these

provisions to be extended repeatedly so that no actual revenue loss ever occurs will have to track

them in perpetuity and repeatedly devote resources to educating new cohorts of legislators about

what they are, their lack of merit, and why they should be extended. This will become more difficult

if the business community’s growing success in enacting these provisions emboldens them to seek

their attachment to more types of tax bills. It is not hard to imagine, for example, that corporate

representatives might seek to attach deferred tax deduction provisions to bills that would repeal

major corporate tax breaks.

Finally, given the brevity of legislative sessions in many states, the enormous number of critical

issues that lawmakers have to deal with, and the lack of resources available to them, there are

consequences to compelling them to devote precious committee and floor time periodically to

extending a tax break that has so little merit.

COST Policy Position, “Consequences of Significant Tax Law Changes on Financial Reporting,” May 25, 2016,

https://cost.org/globalassets/cost/state-tax-resources-pdf-pages/cost-policy-positions/consequences-of-significant-tax-

law-changes-on-financial-reporting.pdf. Emphasis added.

Council On State Taxation letter to Governor Rick Snyder and legislative leadership. Emphasis added.

See the Tax Executives Institute’s policy resolution calling on states to provide deferred tax deductions.