States Act To Avoid Bush Tax Cut Hit

State lawmakers are struggling with the fallout of the bleakest economy in a decade. Layoffs, a resulting drop in revenues and the need for cutbacks have them reaching for Rolaids as they try to devise new budgets.

The budget makers need another revenue hit like they need a punch to the gut, But that’s just what Congress gave them when it hammered through a-post Sept. 11 economic stimulus package. President Bush signed the package into law March 9, and included in it is a massive tax cut for businesses that could cut state revenues by $14 billion between fiscal years 2002 to 2004.

Why? Because 25 states automatically conform their tax codes to federal law. If they want to keep a federal tax break from affecting state revenues, they must act to do so.

Another 21 states periodically vote on whether to incorporate federal tax changes in their tax codes, so the Bush tax cut does not yet have any affect on them. Nevada, Washington and Wyoming do not levy corporate income taxes, so the federal break does not apply there either.

According to the Center for Budget Policy and Priorities, a left-leaning Washington, D.C. research group which is critical of the Bush tax cut, Virginia would lose more than $300 million in corporate income tax money over the next two years if it took no action.

Larger states such as Texas could lose $730 million and even Rhode Island stands to lose $42 million, the Center says.

Faced with that specter, legislatures in Virginia, Wisconsin, Indiana and Maryland have decided not to take the hit. Slipped into the budgets of these four states this year is an arcane provision “deconforming” state income tax code from the federal code. Other states may soon follow suit.

This negates any state tax break a business would have enjoyed as a result of the new federal tax law.

The federal business tax cut lets companies that buy equipment between Sept. 11, 2001 and Sept. 11, 2004 deduct 30 percent of its value immediately.

Supporters say it will stoke the nation’s economy by making it easier for firms to expand. The National Conference of State Legislatures and the National Governors Association opposed the measure, NGA calling it “an assault on the states’ revenue base.”

The Virginia and Indiana legislatures have already approved budgets with the deconforming provisions and lawmakers in Maryland and Wisconsin are poised to do so.

U.S. Sen. George Allen, R-Va., a champion of the tax break in Congress, says while states are free to decide their own tax policy, their decision to ignore the federal cut blunts its pump-priming effect.

“That was one aspect of the package that personally I worked very, very hard for,” Allen said. “But it’s a question of priorities. That’s what budgeting is all about.”

Virginia House Appropriations Chairman Vincent Callahan says not passing on the federal tax cut in the form of lower state business taxes is sound budget policy.

“We already have low taxes in Virginia and we need all the money we can get. Businesses are treated well in this state,” Callahan said.