Tax-Loss Harvesting Part V: State and Local Taxes – The National Law Review

State-Level Taxation and its Impact on Sustainable Development Goals

State and local tax policies are fundamental to domestic resource mobilization, a critical component of achieving the Sustainable Development Goals (SDGs). The ability of a state to fund initiatives related to poverty reduction (SDG 1), quality education (SDG 4), and robust infrastructure (SDG 9) is directly linked to its revenue collection framework. However, the complexity and variance in state tax systems, particularly concerning capital gains and tax-loss harvesting strategies, present significant challenges to ensuring equitable outcomes and strong institutions (SDG 10, SDG 16).

Domestic Resource Mobilization and Institutional Frameworks (SDG 16, SDG 17)

The capacity of U.S. states to generate revenue is a cornerstone of their contribution to the 2030 Agenda. Unlike the federal government, states must balance their budgets annually, making their tax structures vital for sustained public service delivery. The approach to income taxation varies significantly, impacting a state’s ability to mobilize resources effectively.

• Revenue Generation Models: In 2024, 41 states levied individual income taxes, forming a primary source of public funding.
• Dependency on Federal Definitions: The starting point for state tax calculations often relies on federal metrics.
  • 34 states use federal adjusted gross income.
  • 7 states use federal taxable income.
  • 5 states use their own definitions of income.
• Structural Differences: Ten states employ a flat tax rate, which can have regressive effects, potentially undermining efforts to reduce inequality (SDG 10). Nine states levy no income tax, relying on other revenue sources to fund public services.

The Challenge of Federal Tax Conformity for SDG Implementation

A state’s decision to conform with or decouple from the federal Internal Revenue Code is a critical factor in the stability and predictability of its tax system, which are hallmarks of strong institutions (SDG 16). Inconsistent and complex tax codes can create uncertainty, hindering economic growth (SDG 8) and equitable resource distribution. State conformity approaches generally fall into four categories:

1. Date-Based Conformity: States adopt the federal code as of a specific date. This static approach requires legislative action to incorporate federal changes, potentially creating a lag that affects fiscal planning. States include Arizona, Georgia, Hawaii, and Virginia.
2. As-Amended Conformity: States automatically adopt all future amendments to the federal code. This ensures consistency but cedes a degree of policy control. States include Colorado, Illinois, Maryland, and New York.
3. Annual Batch-Processed Conformity: States update their laws annually to incorporate the previous year’s federal changes. This provides a regular but delayed alignment. States include California, Massachusetts, and Minnesota.
4. Select Codes Conformity: States selectively adopt specific federal provisions, creating a hybrid system that can increase complexity. States include Arkansas, New Jersey, and Pennsylvania.

Recent federal legislation, such as the One Big Beautiful Bill Act (OBBB) of 2025, has introduced further flux, compelling states to re-evaluate their conformity status and impacting revenue forecasts for SDG-related investments.

Tax-Loss Harvesting: Implications for Equity and Inequality (SDG 10)

Tax-loss harvesting is a financial strategy that allows investors to offset capital gains with capital losses, thereby reducing their tax liability. While a legal financial planning tool, its accessibility and benefits are skewed towards higher-income individuals with significant investment portfolios. This dynamic has direct implications for SDG 10 (Reduced Inequalities).

• Reduced Public Revenue: Widespread use of tax-loss harvesting by affluent taxpayers reduces the overall tax base, limiting the funds available for social programs aimed at poverty alleviation (SDG 1) and inequality reduction.
• Systemic Complexity: The strategy’s effectiveness depends on disparate state laws regarding capital loss carryforwards and the treatment of capital gains, creating an unequal system where sophisticated investors can navigate complexities that are inaccessible to the average citizen.
• Asset-Specific Rules: The tax implications vary across asset classes, including stocks, digital assets, and real estate, further complicating the landscape and favoring those with access to specialized financial and legal advice.

Asset Classification and Social Equity Considerations

State laws governing the division of marital assets and the tax treatment of different legal partnerships can perpetuate or mitigate social and economic inequalities. The distinction between “separate property” and “community property” states has a significant impact on how assets and liabilities, including capital loss carryovers, are handled, particularly upon the death of a spouse or partner.

• Separate Property States: In most states, upon the death of a spouse, 50% of unused capital loss carryovers from a joint account are eliminated.
• Community Property States: In states like California, Arizona, and Washington, the death of a spouse can result in the elimination of all capital loss carryovers for community property assets.
• Registered Domestic Partners (RDPs): Certain states extend community property rules to RDPs, yet for federal purposes, they must file as individuals. This creates a dual system of reporting that adds complexity and can lead to inequitable financial outcomes, contrary to the principles of SDG 10.

Future Outlook and Policy Alignment with the 2030 Agenda

The evolution of state tax policy in response to federal changes and market volatility presents an opportunity to better align fiscal systems with sustainable development objectives. The increasing accessibility of tax-loss harvesting to a broader range of investors through technology necessitates a re-evaluation of its impact on public revenue and equity.

Strengthening Institutions for Sustainable Growth (SDG 8, SDG 16)

For states to foster decent work and economic growth (SDG 8) and build effective, accountable institutions (SDG 16), tax policies must be transparent, predictable, and equitable. As state legislatures navigate conformity with new federal laws, there is a critical need to consider the long-term impacts on domestic resource mobilization. Careful documentation and clear regulatory frameworks are essential for maintaining public trust and ensuring the financial stability required to fund progress toward the SDGs.

Analysis of Sustainable Development Goals in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

Based on the article’s discussion of legal frameworks, institutional processes, and the equal application of laws to different social groups, the following SDGs are connected to the issues highlighted:

• SDG 10: Reduced Inequalities: The article touches upon inequalities that arise from differing state tax laws and the legal recognition of various family structures. It discusses how financial outcomes can vary significantly based on a taxpayer’s location and marital or partnership status.
• SDG 16: Peace, Justice and Strong Institutions: The core of the article is an analysis of legal and fiscal institutions in the United States. It describes the complex relationship between federal and state tax laws, the mechanisms by which states adopt these laws (“conformity”), and the importance of clear legal frameworks for taxpayers.
• SDG 5: Gender Equality: While not the main focus, the article’s specific mention of how property and tax laws apply to “same-sex couples” and “Registered Domestic Partners (RDPs)” connects to the broader goal of ensuring non-discrimination and equal rights for all, which is a cornerstone of gender equality and LGBTQ+ rights.

2. What specific targets under those SDGs can be identified based on the article’s content?

The article’s content points to several specific SDG targets:

• Target 10.2: “By 2030, empower and promote the social, economic and political inclusion of all, irrespective of… or other status.” The article provides a direct example of this target in action by noting that in “California, Washington and Nevada, the community property rules have been extended to include not just married couples, but also include RDPs.” This is a specific policy action that promotes the economic inclusion of individuals based on their partnership status.
• Target 16.6: “Develop effective, accountable and transparent institutions at all levels.” The entire article is a commentary on the effectiveness and complexity of tax institutions. The detailed explanation of the four different state approaches to federal tax conformity—”date-based,” “as-amended,” “annual batch-processed,” and “select codes”—illustrates the varying levels of effectiveness and transparency in the institutional processes that create state tax law.
• Target 16.b: “Promote and enforce non-discriminatory laws and policies for sustainable development.” The discussion on how community property laws are applied differently across states, and specifically how some states have extended these laws to RDPs, relates directly to the promotion of non-discriminatory laws. The article highlights that RDPs “must generally follow state community property laws” in certain states, which is an enforcement of a more inclusive and non-discriminatory policy.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

The article implies several qualitative indicators that can be used to measure progress:

• Indicator for Target 10.2 and 16.b: The existence of legal frameworks ensuring equal treatment in property and tax law for different partnership statuses. The article provides concrete data points by identifying specific states—”Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin” as community property states, and specifically “California, Washington and Nevada” as those extending these rules to RDPs. Progress could be measured by the number of states that adopt similar inclusive legal frameworks.
• Indicator for Target 16.6: The degree of coherence and predictability in state tax law relative to federal law. The article’s categorization of states based on their conformity type (“date-based,” “as-amended,” etc.) serves as an implied indicator of institutional effectiveness. A shift from a “select codes” or “date-based” system to an “as-amended” system could be seen as progress towards a more effective and transparent institution, as it “automatically” incorporates federal changes without requiring new legislative action.

4. Table of SDGs, Targets, and Indicators

Source: natlawreview.com