By Maria Koklanaris

Law360 (April 14, 2020, 8:02 PM EDT) -- From direct aid to guidance on the taxation of teleworkers, tax professionals seek reassurances from Congress in the next coronavirus relief bill, but lifting the cap on state and local tax deductions is not one of them.

With state tax revenues plummeting amid the novel coronavirus pandemic, tax professionals think that direct aid, bridge loans and reassurance for teleworkers should be considered in the next federal relief bill, which House Speaker Nancy Pelosi, D-Calif., and others have suggested will focus on states.

But tax professionals aren't as enthusiastic about another idea from Pelosi — lifting the $10,000 cap on state and local tax deductions that came from the federal tax overhaul President Donald Trump signed in late 2017.

Here, Law360 presents three things state tax professionals would like to see in the next relief bill.

Direct, Flexible Aid

The recently enacted Coronavirus Aid, Relief, and Economic Security Act , or CARES Act, provided $150 billion to state, local and tribal governments, but a key caveat for using that money is that it go toward "necessary expenditures incurred due to the public health emergency with respect to the coronavirus disease 2019."

That isn't what states need the next time around, said Richard Auxier of the Tax Policy Center. He said states are headed toward a perfect storm of tax increases, service cuts and job losses without a cash infusion. And he said it is paramount that the federal government doesn't impose significant restrictions on how states can use the money.

"It's hitting everyone," Auxier said. "It doesn't matter what your revenue mix is [as a state]. It's all turned off right now. And if that's not replaced with federal dollars, then it's going to lead to service cuts and job losses at the worst possible time."

The Center on Budget and Policy Priorities released a report Tuesday estimating that states would lose $105 billion in fiscal 2020, $290 billion in fiscal 2021 and $105 billion in fiscal 2022. The center said it arrived at these estimates by examining traditional relationships between unemployment rates and state tax revenue but noted this recession is already proving to be different. Sales tax revenue, for one, may not follow trends because consumption may be permanently altered in the wake of the pandemic, the report said.

In addition to a cash infusion for states to shore up budgets, Congress should provide specific additional Medicaid funding, Elizabeth McNichol, an author of the report, told Law360.

As far as tax increases go, Auxier said, states have no good options at the moment. Whether they consider raising sales or income taxes, middle- and lower-income earners are going to be hurt.

"By far, the best possible thing that could happen is federal money to states, so they don't have to do this," Auxier said.

Governors agree. On Saturday, the National Governors Association, led by Republican Larry Hogan of Maryland and Democrat Andrew Cuomo of New York, released an eye-popping statement: The CARES Act money did not help with state revenue shortfalls, and Congress needs to fix that by giving states $500 billion right now.

"The COVID-19 response is resulting in catastrophic damage to state economies, and fiscal assistance is critical now so that we can continue leading this fight," Hogan said in a statement Monday, referring to the respiratory disease caused by the virus.

Without that aid, he said, states will be forced to take actions that will "devastate the economic recovery and our efforts to get people back to work."

Bridge Loans to Compensate for Filing Extensions

With rare exceptions, states have extended their deadlines for income tax filing and payments to July 15 to conform with the federal income tax extension. This was intended to help taxpayers cope with the massive life changes, including dealing with illness and managing social distancing, wrought by the pandemic.

But it has also wreaked havoc on states, as payments they had counted on during the current fiscal year may now be pushed over to the next one. Unlike the federal government, which begins a new fiscal year Oct. 1, most states begin their fiscal years July 1. The Federation of Tax Administrators, which typically avoids the limelight, recently took the unusual step of issuing a statement saying that this loss of cash flow constitutes a crisis, concerned that states will never see some of those payments at all.

In addition to other forms of aid, such as increasing Medicaid, Congress should consider compensating states specifically for this phenomenon, said Marc Goldwein of the Committee for a Responsible Federal Budget.

He said Congress could lend states money to cover the shortfall caused by extending filing and payment deadlines, and states could pay it back when they had collected funds.

"That just seems like such an obvious thing to me," Goldwein said. "It costs the federal government essentially nothing, because interest rates are so low … and it helps states not have to tap into the rainy days because they're trying to be on the same page as the federal government in terms of tax payments."

Reassurance for Employers and Employees About Telework

Whether states can and will assert nexus on businesses whose employees are working remotely at home has emerged as a top concern among state tax professionals during the pandemic.

In the last few weeks, the mass shift to working from home as governments, businesses and individuals seek to comply with stay-at-home orders to avoid spreading the virus means businesses now have presence in states that they didn't have before. Slowly, a trickle of states have begun to say they will not assert nexus simply based on this new presence of employees who may be working elsewhere because of state government orders. But so far, only four states and the District of Columbia have addressed the issue.

Employers and employees deserve a uniform response, Joseph Bishop-Henchman of McDermott Will & Emery LLP told Law360. Congress could provide that response in another relief bill.

"It would be good if it protected employers and employees from nexus or additional taxes if the employee is sheltering in place in a different jurisdiction," Bishop-Henchman said. "Employees shouldn't be punished for working from home, and businesses shouldn't be responsible for additional filing obligations due to employees working remotely."

One Thing to Leave Out — Lifting the SALT Cap

Cuomo of New York has been spending the bulk of his time lately managing his hard-hit state's response to COVID-19. But during a pandemic briefing Saturday, he took a few moments to return to a favorite pre-pandemic topic: his distaste for the SALT cap and his belief that it disproportionately hurts his state. He said he approved of lifting the cap as part of the next relief bill.

"I'll tell you what the federal government should do" to help states, Cuomo said Saturday. "It should repeal SALT, a gratuitous, offensive, illegal action in my opinion, to begin with. That's what you can do if you want to stop with the politics and help people."

State tax professionals tend to disagree. No sooner did Pelosi make her statement about lifting the SALT cap than it was widely panned across the policy and political state tax spectrum.

Jared Walczak of the right-leaning Tax Foundation and Carl Davis of the left-leaning Institute on Taxation and Economic Policy were among those who told Law360 that the SALT cap mainly benefits high-income earners in high-tax states. Those earners are not the most in need of relief, they said. Further, Davis said, the argument that the SALT cap will cause them to leave their states is less relevant amid the pandemic, as most people are staying put.

"I think there are supposed to be two rationales for lifting the SALT cap," Davis said. "One is helping people. The other one is helping state and local governments. I don't think it's particularly effective at either of those objectives."

--Editing by Tim Ruel and John Oudens.

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