Many state lawmakers are bringing a healthy dose of skepticism to discussions around how extensively to link their state tax codes to the corporate tax changes found in last year’s One Big Beautiful Bill Act (OBBBA). While this is both understandable and appropriate, states need to be careful not to overlook the few bright spots in the bill that could be productively incorporated into their own tax laws.
The bill’s treatment of NCTI (pronounced “necktie,” for the uninitiated) is one federal provision that holds immense potential for states. Including NCTI in state corporate tax law is an effective way to neutralize much of the tax avoidance that occurs when multinational companies artificially shift their profits into overseas tax havens.
NCTI, or Net Controlled-Foreign-Corporation Tested Income, is a sweeping definition of profits reported by the foreign subsidiaries of U.S. companies. It is the somewhat reworked successor to GILTI, or Global Intangible Low-Taxed Income, that was first enacted at the federal level in 2017.
While the federal government is not particularly interested in taxing profits earned legitimately on the other side of the world, Congressional Republicans have now affirmed twice (in 2017 and 2025) that responsible tax administration requires including these profits as one part of the corporate tax calculation. Turning a blind eye to profits booked offshore makes it far too easy for corporations to skip out on their federal tax bills by pretending their U.S. profits were generated in tax havens like the British Virgin Islands or Switzerland.
This lesson is equally applicable at the state level. The states, like the federal government, have a clear interest in making sure their corporate taxes cannot be easily sidestepped by companies that offshore their profits into tax havens.
The gold standard approach for states seeking to neutralize offshore profit shifting is called worldwide combined reporting (WWCR), which we and others have written about elsewhere. For states that aren’t yet ready to make the leap to WWCR, however, conformity to NCTI offers a simple way to achieve some of the same benefits through linkage to a well-established, IRS-audited definition of corporate profits booked abroad.
To be clear, the goal of state conformity to NCTI is not to tax legitimate foreign-source income; indeed, states cannot legally tax corporate profits that were genuinely earned outside their borders. Any state including NCTI in its tax base must take care to ensure that it taxes an appropriate share of this income that can be reasonably thought of as tied to in-state economic activity.
Following the 2017 enactment of GILTI (the predecessor to NCTI), states have tended to do this by including only a certain portion of GILTI (between 5 and 50 percent) in their pre-apportionment tax calculations, and then applying what’s known as an “apportionment formula” to determine what sliver of that 5 to 50 percent should actually be taxed by their state, as opposed to some other state.
While this approach is a major improvement over ignoring NCTI altogether, an even better option would be for states to integrate NCTI more thoroughly into their tax codes by comprehensively bringing this income into their tax calculations without any default percentage deduction. Under this approach, states would then determine the appropriate share to tax on a company-specific basis through use of their apportionment formulas, which in most states means taxing a share of this profit based on the percentage of the company’s total sales occurring in that state. If 3 percent of a company’s global sales are to customers in a state, for instance, then 3 percent of that company’s profits would be fair game to tax.
New Hampshire, Utah, and Vermont are already making full use of their apportionment formulas to identify an appropriate share of NCTI to tax based on each company’s domestic and international sales profiles, proving that this approach is administratively feasible. These three states would, however, be wise to repeal their 50 percent deductions for NCTI that are needlessly exempting some shifted profits from state tax and duplicating the work already being done by their apportionment formulas in finding the right share of this income to tax.
NCTI has quickly become a vital part of federal corporate tax law and states should not cast aside this provision as they work to link up their tax laws to parts of the recently revised federal code. Including NCTI in state tax codes allows states to shore up their tax bases against the persistent problem of offshore corporate tax avoidance. The federal government has been using NCTI and its predecessor, GILTI, for more than eight years to curb federal tax avoidance that arises from aggressive offshore profit shifting. It’s time for the states to catch up.
