HB 495
Department of Legislative Services
Maryland General Assembly
2021 Session
FISCAL AND POLICY NOTE
First Reader
House Bill 495 (Delegate Palakovich Carr)
Ways and Means
Income Tax - Internal Revenue Code Amendments and the Federal CARES Act -
Decoupling
This bill generally decouples the State in certain tax years from the federal Coronavirus
Aid, Relief, and Economic Security (CARES) Act business income tax provisions related
to the (1) temporary and retroactive expansion of a net operating loss (NOL);
(2) elimination of certain limitations on noncorporate excess business losses; and
(3) increase in the deduction for business interest expense. The bill also alters the automatic
one-year decoupling provision under the State personal and corporate income tax by
specifying that the provision applies to amendments of the Internal Revenue Code (IRC)
that reduce State revenues in any taxable year that precedes the calendar year in which the
amendment is enacted. The bill takes effect July 1, 2021.
Fiscal Summary
State Effect: General fund revenues increase by $66.9 million in FY 2022 due to
additional income tax revenues. Transportation Trust Fund (TTF) revenues increase by
$5.4 million and Higher Education Investment Fund (HEIF) revenues increase by
$2.2 million in FY 2022. TTF expenditures increase by $0.7 million in FY 2022 and
decrease by $0.1 million in FY 2026. General fund expenditures increase by $0.1 million
in FY 2022 due to one-time implementation costs at the Comptroller’s Office.
($ in millions) FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
GF Revenue $66.9 $13.4 ($14.9) ($8.3) ($6.6)
SF Revenue $7.7 $1.5 ($1.7) ($0.9) ($0.8)
GF Expenditure $0.1 $0 $0 $0 $0
SF Expenditure $0.7 $0.1 ($0.2) ($0.1) ($0.1)
Net Effect $73.7 $14.8 ($16.5) ($9.1) ($7.3)
Note:() = decrease; GF = general funds; FF = federal funds; SF = special funds; - = indeterminate increase; (-) = indeterminate decrease
Local Effect: Local revenues increase by $23.8 million in FY 2022 and decrease by
$2.3 million in FY 2026. Local expenditures are not affected.
Small Business Effect: Meaningful.
Analysis
Bill Summary/Current Law:
Comptroller Assessment and Federal Decoupling
Current Law
The Budget Reconciliation and Financing Act of 2002 (Chapter 440) included a general
one-year income tax “decoupling” provision. Within 60 days after an amendment of IRC
is enacted, the Comptroller must submit a report to the Governor and the General Assembly
that outlines the changes in IRC, the impact on State revenues, and how different types of
taxpayers will be affected. If the Comptroller determines that the federal tax change alters
taxpayer income and will impact State revenues by at least $5 million (positive or negative)
in the fiscal year that begins during the calendar year in which the federal tax change was
enacted, the federal tax change does not apply for Maryland income tax purposes for any
taxable year that begins in the calendar year in which the federal tax change is enacted.
Otherwise, the federal tax change applies for Maryland income tax purposes in that tax
year. After this first tax year, amendments to IRC apply for Maryland income tax purposes
unless otherwise explicitly provided by law.
Bill Provisions
The automatic decoupling provision generally prevents a change to the federal tax code
from significantly impacting State revenues until the General Assembly has the opportunity
to either accept or reject the change. However, the automatic decoupling does not apply to
federal legislation that, in its year of enactment, would alter the computation of taxable
income for previous taxable years. The bill specifies that beginning in tax year 2021 the
automatic decoupling provision also applies for any taxable year that precedes the
calendar year in which the amendment is enacted and the Comptroller’s Office determines
that the federal tax change will impact State revenues by at least $5 million in the fiscal year
preceding the calendar year in which the amendment is enacted.
HB 495/ Page 2
Federal Coronavirus Aid, Relief, and Economic Security Act
Federal Provisions and Comptroller Assessment
On March 27, 2020, President Donald J. Trump signed into law the CARES Act. The
CARES Act made temporary changes to several federal income tax provisions relating to
business income, which are intended to increase cash flow and reduce the income tax
burden on corporations, partnerships, and individuals.
On June 12, 2020, the Comptroller published a report identifying three alterations by the
CARES Act that have a significant impact on income tax revenue: (1) temporarily and
retroactively expanding NOL lookback provisions for tax years 2018, 2019, and 2020
previously enacted under the Tax Cuts and Jobs Act (TCJA) in § 172 of IRC; (2) increasing
the limit on the deduction of business interest expenses in tax years 2019 and 2020 under
§ 163(j) of IRC; and (3) eliminating business excess loss limitations imposed on certain
noncorporate taxpayers by TCJA under § 461(l) of IRC for tax years 2018, 2019, and 2020.
In its revised estimate, the Comptroller’s Office estimated the State revenue loss related to
these provisions to be $16.0 million for fiscal 2020 and $81.5 million for fiscal 2021.
Based on the estimated State revenue impact of certain CARES Act changes, Maryland is
automatically decoupled from the provisions with a revenue impact greater than $5 million
for tax year 2020. However, since the automatic decoupling statute only applies to a
single taxable year, Maryland is not decoupled from the provisions affecting
tax years 2018 and 2019. The Comptroller’s Office advises that it has already begun
processing returns for tax years 2018 and 2019, which are being filed in response to the
CARES Act provisions.
Bill Provisions
Under the bill, in tax year 2021 a taxpayer is generally required for State income tax
purposes to add back to income and to adjust for the impact of CARES Act provisions
related to (1) NOLs in tax years 2014 through 2020; (2) excess business loss limitations in
tax years 2018 through 2020; and (3) interest expense deductions in tax year 2019 and
2020. In addition, in tax years 2021 through 2025, a taxpayer must generally add back to
income any excess farm losses allowed under the CARES Act.
State Revenues: The bill generally decouples the State income tax in certain tax years
from specified CARES Act business income tax provisions. As a result, general fund
revenues increase by $66.9 million, TTF revenues increase by $5.4 million, and HEIF
revenues increase by $2.2 million in fiscal 2022. Exhibit 1 shows the fiscal impact of the
bill in fiscal 2022 through 2026.
HB 495/ Page 3
Exhibit 1
State Fiscal Impact
($ in Millions)
2022 2023 2024 2025 2026
General Fund $66.9 $13.4 ($14.9) ($8.3) ($6.6)
HEIF 2.2 0.4 (0.5) (0.3) (0.2)
TTF 5.4 1.1 (1.2) (0.7) (0.5)
Total Revenues $74.5 $15.0 ($16.6) ($9.2) ($7.4)
TTF Expenditures $0.7 $0.1 ($0.2) ($0.1) ($0.1)
HEIF: Higher Education Investment Fund
TTF: Transportation Trust Fund
This estimate is based on the Comptroller’s estimated revenue impact of the CARES Act
provisions, adjusted for the effective date of the bill.
State Expenditures: The Comptroller’s Office reports that it will incur a one-time
general fund expenditure increase of $90,000 in fiscal 2022 to add the add-back provisions
to the income tax forms. This includes data processing changes to the income tax return
processing and imaging systems and systems testing.
A portion of TTF revenues are used to provide capital transportation grants to local
governments. Thus, any increase in TTF revenues from corporate income tax revenues
results in a 13.5% increase in TTF expenditures to local governments (9.6% beginning in
fiscal 2025). Accordingly, TTF expenditures increase by $0.7 million in fiscal 2022 and
decrease by $0.1 million in fiscal 2026, as shown in Exhibit 1. TTF revenues also fund the
State capital program; thus, a change in TTF revenues also impacts expenditures for the
State capital program.
Local Revenues: Local revenues will be impacted by the difference in (1) local highway
user revenues distributed from the corporate income tax and (2) local income tax revenues
due to the personal income add-back provisions. As a result, local revenues increase by
$23.8 million in fiscal 2022 and decrease by $2.3 million in fiscal 2026, as shown by
Exhibit 2.
HB 495/ Page 4
Exhibit 2
Local Fiscal Impact
($ in Millions)
2022 2023 2024 2025 2026
Local Income Tax $23.1 $4.6 ($5.2) ($2.9) ($2.3)
Local Highway User Revenues 0.7 0.1 (0.2) (0.1) (0.1)
Total $23.8 $4.8 ($5.3) ($2.9) ($2.3)
Small Business Effect: Small businesses that are required to add back to income to reflect
the changes to specified business income provisions will be adversely impacted through
increased income tax liabilities.
Additional Information
Prior Introductions: None.
Designated Cross File: None.
Information Source(s): Comptroller’s Office; U.S. Joint Committee on Taxation;
Department of Legislative Services
Fiscal Note History: First Reader - February 3, 2021
rh/hlb
Analysis by: Robert J. Rehrmann Direct Inquiries to:
(410) 946-5510
(301) 970-5510
HB 495/ Page 5