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Tough choices ahead in the federal, state and local tax landscape

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U.S. Capitol

Bloomberg/Bloomberg via Getty Images

Whenever there has been single party control of the White House, Senate and House, there is the potential for a major tax bill, according to Dustin Stamper, managing director at Grant Thornton’s Washington National Tax Office. 

“One of the reasons is that tax is one of the few things that can be accomplished through the reconciliation process,” he observed. “That allows the Senate to pass legislation with fewer than 60 votes.”

This is critical for the fate of the Tax Cuts and Jobs Act, many of the provisions of which expire in 2025. “I don’t think Congress is looking to blindly extend the TCJA in its current form,” said Stamper. He believes lawmakers will instead use the expiration as a trigger event to proceed with broader reform.  

“They will be faced with some hard decisions to make between priorities,” he said. “Like most campaigns, they probably overpromised. Just extending the TCJA in its current form is estimated to cost $4.6 trillion, assuming the SALT cap is extended. If they end the SALT cap while extending everything else, the cost will approach nearly $6 trillion, and that’s before any of the tax cut promises made on the campaign trail. There were times over the summer when it felt as though a new tax cut was proposed at every campaign stop. Tips, overtime, Social Security, Americans living abroad, a deduction for loans to purchase domestic cars — they can’t afford everything, so they will need to make some tough choices.”

“The campaign themes are sometimes more important than the details, because campaign platforms have one purpose — to get the candidate elected,” he said. “They don’t have to be politically feasible or technically sound or administratable. Everything will change or evolve as they go through the legislative process. One of the important themes is that Trump was very focused on more populist tax proposals benefiting individuals, and that’s different from his message in 2015, when he was focused on making corporations more competitive globally. That’s more of an afterthought this year. So despite a business-favorable Republican majority, there should be some concern in the business community that some of the individual tax cuts get prioritized over business proposals.”

There are separate issues from a SALT perspective, according to Jamie Yesnowitz, principal and state and local tax leader at Grant Thornton’s Washington National Tax Office. First, in a ballot initiative, voters in Washington State decided not to repeal a long-term capital gains tax put into place in 2022. Oregon rejected an increase in the corporate minimum tax, North Dakota voters rejected a potential repeal of the property tax, and South Dakota rejected a repeal of a grocery tax on grocery items. 

“The common theme of these decisions was that the voters were willing to leave legislative choices alone,” said Yesnowitz. “They were not willing to adopt new provisions that would impact states significantly. From the state perspective, that’s important. Most states are controlled by one political party — the governor and both houses. In that situation, when there is control of the whole governing apparatus, there is more likely to be consideration of significant tax reform.”

“In Louisiana, the legislature is currently in special session, where there is Republican control with a potential of significant tax cuts and a potential expansion in sales taxes,” he continued. “In the recent state elections, there were no changes in governors, but in the state legislatures, Democrats in Michigan lost their trifecta, and the House in Minnesota appears tied.”

Changes in the corporate income tax on the federal side might have a significant effect on state corporate income taxes, since nearly all states are tied to the federal tax, Yesnowitz observed. 

“It will cause states to rethink their conformity to the federal tax,” he said. “It’s similar to what we saw with the TCJA and the CARES Act in response to the pandemic. And to the extent to which cuts on the federal side are significant, there will necessarily be some level of cuts on the federal side, which could cause cuts on the part of states, since the federal government subsidizes a certain amount of state activity. That pressure may force states to reconsider their tax issues, potentially leading to an increase in state income tax as well as sales tax in many jurisdictions.”

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Accounting

IAASB tweaks standards on working with outside experts

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The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.

The proposed narrow-scope amendments involve minor changes to several IAASB standards:

  • ISA 620, Using the Work of an Auditor’s Expert;
  • ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
  • ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
  • ISRS 4400 (Revised), Agreed-upon Procedures Engagements.

The IAASB is asking for comments via a digital response template that can be found on the IAASB website by July 24, 2025.

In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.  

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Accounting

Tariffs will hit low-income Americans harder than richest, report says

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President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an analysis from the Institute on Taxation and Economic Policy.

The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings. 

Trump has imposed the steepest U.S. duties in more than a century, including a 145% tariff on many products from China, a 25% rate on most imports from Canada and Mexico, duties on some sectors such as steel and aluminum and a baseline 10% tariff on the rest of the country’s trading partners. He suspended higher, customized tariffs on most countries for 90 days.

Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.

Food prices could rise by 2.6% in the short run due to tariffs, according to an estimate from the Yale Budget Lab. Among all goods impacted, consumers are expected to face the steepest price hikes for clothing at 64%, the report showed. 

The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.

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Accounting

At Schellman, AI reshapes a firm’s staffing needs

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Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist Schellman do more things with fewer people, allowing the firm to scale back hiring and reduce headcount in certain areas through natural attrition. 

Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time. 

“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said. 

One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load. 

“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai. 

Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies. 

“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.

However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area. 

“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai. 

As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales. 

“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai. 

While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves. 

“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”

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