Tax Conformity: Can We Make It Move?

by Tom Yamachika, President, Tax Foundation Hawaii

Hawaii taxpayers will have to file an amended tax return this tax season in order to obtain some of the same deductions they enjoyed last year. How can this be? It seems very odd, but it is all due to a thorny issue called “conformity.”

In this context, conformity means similarity to the federal tax code. With conformity, we can start with federal numbers, work through a few changes, and be done. Although the process sounds easy, the devil is in the details, especially when Congress has developed a habit over the last decade of letting tax provisions expire or get very close, only deciding at the very end of the year (or, in 2012, the beginning of the next) which provisions would be extended to that year. The tax software companies almost everyone uses these days have a tough time keeping up with the brinksmanship, even without considering the state returns.

When it comes to the states, most state laws, including ours, can’t just automatically do what the Feds do. We need state lawmakers to decide which federal changes to pick up and which to reject. That is for a very good reason. Our state constitution gives our legislature the responsibility to make our tax laws. They cannot punt that duty off to anyone else, including Congress. Until our lawmakers act, software makers are in a quandary. The instructions our department of taxation gives to the software makers say this:

The following federal provisions that were adopted by Hawaii expired at the end of 2014: (1) the $250 deduction for educator expenses, (2) the election to deduct state and local general sales taxes…, (3) the deduction for mortgage insurance premiums [sometimes known as PMI], (4) the tax-free distributions from individual retirement plans for charitable purposes, … At the time this instruction booklet was printed in October 2015, there was pending federal legislation that would reinstate certain provisions. If federal legislation is passed in 2015 to reinstate these provisions and these provisions are adopted by the 2016 Hawaii State Legislature, then these provisions may be claimed.

This booklet tells the software companies that their products are not to make software reflecting the law as they think it’s going to be; they must reflect the current law. For example, educators who want to file their 2015 returns on time will have to go without the $250 deduction and homeowners who pay PMI will have to forego this deduction. If and when our conformity legislation is passed, the teachers and homeowners with PMI can come back and file an amended return. This is a real hassle for them, as well as for the Department of Taxation, because all amended returns are processed manually.

One option that lawmakers should seriously consider is “moving date conformity,” which is in place in 22 jurisdictions (AL, CO, CT, DE, DC, IL, KS, LA, MD, MI, MO, MT, NE, NM, NY, ND, OH, OK, PA, RI, UT, VT). In those states, changes in federal tax law automatically apply to the state tax code as they occur, but the state is given the option to pass specific legislation to decouple from any new federal law it does not like. That should give the software makers enough comfort to change the software to accommodate the vast majority of federal changes while still allowing our elected legislators to weigh in on what is best for Hawaii and eliminating the need to file as many amended returns.