These days state tax policy occupies a greater percentage of the professional lives of many TEI members for a variety of reasons. We wanted to dive deep into this phenomenon, so we convened a roundtable of seasoned practitioners in the field, including Ellen Berenholz, executive director of tax policy at Comcast Corporation; Deborah Bierbaum, assistant vice president for tax, external tax policy, at AT&T Services Inc.; and Jamie Fenwick, vice president of strategic tax at Charter Communications. Michael Levin-Epstein, senior editor, moderated the discussion.
Michael Levin-Epstein: What are the different ways to handle the state tax policy function?
Jamie Fenwick: Broadly, you could put the tax policy function within the tax department, which is what my company does. The alternative version that I’ve seen in other companies that also seems to work—it just depends on the specific circumstances—is to have the tax policy function within the government affairs group. I think both work equally well.
Deborah Bierbaum: I would echo that; I think there are pluses and minuses of having it in either tax or external affairs, depending on the resources available. Even if it is located in tax, you could have it as a separate freestanding function, or where the people engaged are primarily involved in other functions in tax.
Ellen Berenholz: I would elaborate a little more that you could structure the federal policy and state policy as separate functions, both within tax and within government affairs.
Levin-Epstein: What do you think are the advantages and disadvantages to combining federal and state together versus keeping them separate, whether they’re in government affairs or in the tax department?
“I think partnering with government affairs is key. They have the relationships, generally, with the state legislators and an understanding of the process in their states. They know what the lobbying laws are in the state.”
— Deborah Bierbaum
Berenholz: I would say that keeping them together, the advantage is that one person has a broad overview of all the issues, because the federal and the state and the local and the international are often interrelated. One decision can impact another, so it’s nice to have a single point person on that team who would have visibility to all of those functions or sub-functions.
Bierbaum: Certainly, when you have a separate function, as we do at AT&T, devoted to this, having all of us work together on the various tax issues is a plus, as many issues overlap. We benefit from the learning together, and what happens at the federal level often flows through to the state level, and it keeps consistency in the work. However, I have seen it where tax policy is not a separate function, and it might be somebody’s part-time job. In that case, there may be advantages to have the state and federal person be different because of their other responsibilities.
Fenwick: I think that’s right.
Berenholz: On the same kind of topic, and this may be talked about in a later question, but the advantage of having the policy function within the tax group is that that person would be closer to the people actually doing the compliance or the audits or the controversy as opposed to the government affairs group, where the person in policy there is likely closer to the policymakers. Those would be considerations to balance when structuring which function would house the tax policy department.
Levin-Epstein: Can you think of examples in which that kind of collaboration has worked at your company?
Fenwick: Before we get into specific examples, generally you can’t maintain a successful tax policy function without having good relationships and working closely with either the internal government affairs group or your external lobbyists—particularly if the tax policy function is not within the government affairs group and is instead in the tax department. It’s definitely a function where you have to have those relationships built, and you have to rely on those relationships in order to get your priorities pushed forward.
Berenholz: You have to like people, because it’s all about relationships.
Bierbaum: I think partnering with government affairs is key. They have the relationships, generally, with the state legislators and an understanding of the process in their states. They know what the lobbying laws are in the state, so if you were to work without your government affairs people, you could be stepping into ethics violations and not know what you have to do to make sure that your company is properly protected from a lobbying standpoint.
Levin-Epstein: What kind of an issue might you work with somebody in the government affairs department on?
Bierbaum: We had an issue—and I think it impacts all of our companies—our business unit, whenever there’s a national disaster declared in an area, our disaster recovery team has to send out employees and crews to help restore our networks in the jurisdictions. When they deploy crews, there were often tax or regulatory problems getting in the way—whether or not they had to withhold tax on the people that were going into the state and register the separate legal entity that employs the impacted employees. The business unit came to us and said, “Can you help us solve this problem?” We worked to develop a model bill, partnering with our external affairs teams; we met with state legislative groups and developed a model bill. We worked together as an industry to make sure it worked for all the companies, and we now have this bill in place in twenty-seven states. Hopefully we will be increasing that number as we move forward in this session. It has been a very successful partnership in trying to solve a problem that the business had between the tax department, the business unit, and external affairs.
Fenwick: I can provide another example. Over the last few years, there has been a significant amount of tax reform in North Carolina, and we worked very closely with our government affairs group that handles North Carolina. We got on weekly calls during the legislative sessions. Our goal was to make sure that the government affairs folks who are walking the halls in the state capitol understood how potential tax reform could impact us, and knew the specific issues that would impact us negatively or other taxpayers as well. We would develop talking points and educate our government affairs folks so that they could know how to react as questions came up. I think most companies would say that the tax reform efforts in North Carolina have been largely successful, both from a company standpoint or an industry standpoint as well as from a government standpoint, in that North Carolina has seen significant increases in their revenues over the last few years following reform. So, that is an example of where we worked together with our government affairs folks on specific legislation that was passed.
Berenholz: Another example [is] the efforts we’ve done to mitigate “pyramiding of tax,” so the incidence of tax should only be on the ultimate consumer. We’ve worked with outside third-party economists to do studies to support how tax on business inputs is detrimental to investment. That’s an example of another way that we’ve worked with outside groups and the government affairs team to effect good tax policy.
Levin-Epstein: Is it the same person who looks at both the laws and policy, or are those separate functions within the state tax function?
Bierbaum: It’s a little combination of both. By being in tax, my team will review the legislation and how it impacts us. They will reach out to others in the tax department who are in either operations or compliance or an audit function within the tax organization to get their input on how the bill would impact us, whether or not there is some provision to the bill that would make it more difficult for them to comply with the law. They would help us understand the actual fiscal impact of the legislation on our company or our customers, so we have to work very closely with others in the tax department to make sure that we are developing the right policy position on the legislation or regulations for our company. In addition to knowing the law and the impact on the company, it really helps for the people in my group to understand where the business is going, how our company works, how our products and services work. Because whenever you are trying to find a solution for an issue, especially in an industry—in any sector of the economy—where things are changing, it is important to know how your product and services are changing, what your tax appetite is to use credits or incentives in a state, so you can fully develop a position that is best for the company and the organization.
“This year’s going to be particularly active with federal tax reform. Every state has to figure out how they conform or not to the new federal law.”
— Ellen Berenholz
Fenwick: I would just build off of that to say that in addition to understanding your company and the products and services that you provide, it’s also helpful in the tax policy area to have at least a general working knowledge of multiple types of taxes. A lot of times, especially in the state tax area, people tend to specialize in either income tax, sales and use tax, or property tax, but to be successful in tax policy, you need to be conversant and have at least a general working knowledge of all of those taxes and also have the ability to do a deep dive on any of them when a particular issue arises. But I would definitely echo what Deborah said about working closely with those specialists that are entrenched in any of those tax functional areas on a day-to-day basis and utilizing their knowledge as issues arise.
Berenholz: I would echo what you said, Jamie, because I’m Exhibit A of that. I’ve been at Comcast twenty-six years, but I’ve only done tax policy since 2011. I worked part-time when my daughters were growing up, and every time I missed a department lunch or meeting because it wasn’t my day to work, I got assigned a new function. So, I’ve done state and local tax compliance, I’ve done property tax, I’ve done tax controversy. Having deep knowledge in all of those areas has actually been very beneficial in structuring advocacy that crosses different tax subspecialties.
Bierbaum: I think that broad understanding is key, because a lot of times, when you get a budget bill from a state, it could impact every tax. If you don’t know the interactions between the various taxes you could be missing something when you review the legislation. So, Jamie’s point that it’s good to know all of the taxes is very key to be[ing] successful in a tax policy function.
Levin-Epstein: Are there some states that are particularly active in the tax area?
Fenwick: The large states are almost always active, like New York and California, Illinois, and other states as well. North Carolina’s a good example of one that’s done sweeping, comprehensive tax reform over the last few years. But really, any state that you operate in can be active from a tax policy standpoint. It definitely ebbs and flows based on the election cycles.
Bierbaum: I would build off that. One of the things that I would look at before we go into session is how many states are facing deficits, because generally if states are facing big deficits and it’s not an election year, it could be a very active year in the legislative environment. For example, Louisiana, over the past few years, has been very active just because of the deficits they have been facing. Same with Connecticut as they try to struggle to balance their budgets, which is something states generally have to do, unlike the federal government.
“Over the last few years, there has been a significant amount of tax reform in North Carolina, and we worked very closely with our government affairs group that handles North Carolina. We got on weekly calls during the legislative sessions.”
— Jamie Fenwick
Berenholz: This year’s going to be particularly active with federal tax reform. Every state has to figure out how they conform or not to the new federal law.
Levin-Epstein: What do you think is the most complicated state tax law or policy issue in the last five years?
Bierbaum: I think what Ellen just mentioned about federal tax reform impacting the state is probably one of the most difficult. There’s a lot of provisions that were enacted at the federal level that take effect at varying times, some in 2017 and many on January 1, 2018. Because this bill passed at the federal level December 22, 2017, the states are now wrestling with how it impacts them. We are wrestling with how it impacts us and how we are going to engage in that process as states propose legislation. New York came out recently with a preliminary report, with some amendments to their budget bill dealing with the issue. We still do not have clarity yet on some of the issues at the federal level, and we are trying to figure out how that works at the state level in the legislation. I think it is one of the most complicated things we are facing this session.
Fenwick: I definitely agree. We haven’t really seen anything on this sweeping scale in the last five years that would top this. It’s going to impact basically every state. I think a lot of states are still trying to get their arms around it, and until they know, we are not going to know how they’re going to react. I think that’s absolutely right, Deborah.
Tax Reform Legislation
Levin-Epstein: What’s the practical impact of the tax reform legislation on state tax policy?
Bierbaum: There’s a lot of issues that are complicated, but there is one thing that probably they all present as challenges at the state level. At the federal level you have a consolidated group of entities. When you file your state returns, you might have a totally different group than the federal; each entity might file its own return separately, so how do you take these federal provisions that were calculated one way at the federal level that potentially will require different calculation at the state level? The interest limitation—do you have to calculate as if federal returns match the state group? Will there be an interaction with other state provisions when things were eliminated at the federal level but they are not eliminated at the state level? Trying to address those challenges, whether it is the globally low-taxed intangible income or whether it’s limitations on your interest deductions, is a challenge.
Berenholz: I would add that I think groups like TEI, COST, [the Council on State Taxation] and the Tax Foundation will all be very active in the coming months on this particular issue.
Bierbaum: That’s a good point that Ellen’s making, that a lot of times in doing this function there are some industry-specific issues that we will work on our own or get together as companies—the three of us have worked together a lot. However, when you are looking at an issue that broadly impacts all companies, it is often better to work with groups like the Council on State Taxation or the individual state chambers. In New York, for example, as the state is wrestling through the budget bills, we are working very closely with the [Business Council of New York State]. Because it is not an industry-specific issue; it impacts all companies, regardless of what we have as our main product or service.
Fenwick: I’ll just add onto that that in addition to those industry organizations that we can work with, it’s also going to be imperative to work with legislator and tax administrator organizations like NCSL, ALEC, the MTC, and FTA to make sure that both legislators and administrators are educated on what the changes are at the federal level and how they could impact their state revenues. And then, have a meaningful dialogue with them as far as “if you’re a windfall state or you’re a shortfall state, what are you going to do with that? Are you going to take a windfall and try to accomplish other policy goals by reducing taxes that you maybe wanted to reduce in the past but you couldn’t because you didn’t have the revenue to cover it? If you’re a shortfall state, how are you going to make up those gaps? Are you going to look to expand existing taxes, look at new taxes, or are you going to handle it by taking the opportunity to reduce your budget?” I think having those open dialogues at forums such as NCSL, ALEC, MTC, etc., is going to be key to getting our arms around these very complicated tax issues.