States are sticking with most CARES Act tax provisions

Just last week, the Nebraska Legislature’s Revenue Committee held a hearing on the impact conforming with federal tax provisions in the CARES Act would have on the state’s tax revenues. Revenue Committee Chair Sen. Lou Ann Linehan ended that meeting by stating that decoupling from CARES Act tax regulation was not out of the question.

Nebraska automatically adopts most federal income tax policy changes into its state tax code barring additional legislative action. Adopting a policy unique to Nebraska for state income tax purposes is often known as “decoupling.”

During the same meeting, Sen. John McCollister asked what other states were doing regarding the CARES Act tax changes. Across the board, there appears to be a national conversation on whether to conform or decouple. However, few states have actually made the decision to decouple, and most have focused on only one tax provision in the relief legislation.

So far Colorado, New York, and Minnesota are the three states leading the charge to decouple from CARES. Colorado legislators expect to recoup $1.6 billion by decoupling from CARES. The argument for decoupling is to use this revenue to help offset the significant losses expected due to COVID-19. However, decoupling also comes at some additional cost to the state. Colorado’s Department of Revenue is expecting to spend $16 million over the next four fiscal years to implement the decoupling provisions, whereas if the state decides to conform, there would be no additional cost.

The remaining decoupling states have targeted a provision related to “limits (to) the deduction for business interest expense,” known under the tax code as IRC 163 (j).

States across the nation are grappling with whether to conform or not to conform to the CARES Act’s tax policies, and Nebraska is no exception. If the Legislature does move forward with the decision to decouple, though, Nebraskans and Nebraska businesses could be seeing additional taxes on the horizon.