State Tax Policy 101, Pt 1: Income & Unemployment Insurance Taxes

In the first of six sessions for our State Tax Policy Boot Camp (https://taxfoundation.org/state-polic..., we explore individual and corporate income taxes plus the timely subject of unemployment insurance taxes.

Income taxes are the largest source of state tax revenue, generating 41 percent of state tax collections nationwide despite nine states forgoing a wage income tax and five states going without a tax on corporate income. Everyone knows income taxes—but sometimes the details can be murky.

What does it mean to conform to the Internal Revenue Code on a static or rolling basis and why does it matter? What is the difference between a personal exemption and a personal exemption credit? What determines domicile for income tax purposes? How long does someone have to work in a state to pay income taxes there, and how does that affect their tax burden in their home state? What is the purpose of inflation indexing, and why are there so many different approaches to it? Why—and how—do most small businesses pay individual income taxes, and how does this burden compare to those paid by traditional corporations?

How is corporate income apportioned among states? How do you know where a service has been performed for tax purposes? Do economic development incentives work, and how do the different types compare? What is meant by terms like throwback rules, cost recovery, net operating loss carryforwards, or GILTI, and why do they matter?

We address these questions and more in this informative first session.

Unemployment insurance (UI) taxes, meanwhile, are opaque to even the most senior policymakers. We will walk through the basic structure of unemployment insurance taxation, explaining how each business’s rate is determined, outlining some of the key provisions of UI taxation, and highlighting how the exhaustion of state unemployment compensation funds yields automatic UI tax increases.

AREAS OF FOCUS:

1. Individual income tax structure and the treatment of multistate income

2. Corporate income tax apportionment, sourcing, and income adjustments

3. Unemployment insurance tax design and the determination of UI tax liability

SESSION RESOURCES:

Personal Income Tax Conformity
(https://taxfoundation.org/state-confo...)

Inflation Adjustments
(https://taxfoundation.org/inflation-a...)

Convenience Rules
(https://taxfoundation.org/remote-work...)

Throwback Rules
(https://taxfoundation.org/throwback-r...)

Net Operating Losses

Corporate Income Tax Conformity (GILTI and Expensing)
(https://taxfoundation.org/gilti-state...)

Unemployment Insurance (UI) Taxes
(https://taxfoundation.org/unemploymen...)

State UI Needs
(https://taxfoundation.org/unemploymen...)