Tennessee Legislature Passes Legislation Decoupling from Federal Tax Reform Changes

The Tennessee Legislature having debated the implications of Federal Tax Reform the entire legislative session chose to pass an “election-year” bill that would decouple Tennessee from Federal Tax Reform changes related to interest expense limitations beginning for the 2020 tax year (that's right, not much to see here for the time being as anything could change over the next year). This change has been a hot topic across the country in state legislatures with many states choosing to decouple and forego the revenue that is anticipated from the Federal change.

In addition to interest expense provision, the bill also decoupled from the Federal change to tax state economic incentive grants as income. This change is effective for tax years beginning on or after January 1, 2017, so it should mitigate any disadvantage that this would have placed on Tennessee in its economic and community development efforts. 

With respect to the interest deduction, the Tennessee legislature chose to put their toe in the water but was reluctant to take the full plunge and decouple for what was described as revenue concerns for the 2018-2019 budget. In the short term, businesses will have little comfort from this change but will likely move next session to lock this in for future periods. 

But for now legislators can go out and campaign on how they have worked to keep business taxes low, while really having done nothing to address the issues presented with the interest expense change. Such is the legislative process, but Tennessee taxpayers really can take little comfort from this bill and are left to wait and see which way the wind blows next year to really know what Tennessee will do with this issue.

Notably from the same legislation, the Legislature stripped out a proposal that would have allowed the Department of Revenue to hire third-party consultants to assist with the audit process in Tennessee. Lobbyist groups focused on this issue and were able to win a victory against the trend of third-party auditors across the country.

The Legislation can be found here.