Stateline Story

Uncertainty of Bush-Era Tax Cuts Leaves States in Budget Limbo

If Congress lets the Bush-era tax cuts expire at the end of the year, some states could see millions of dollars disappear while other states stand to see their revenues expand significantly. But states will have to wait until December, at the earliest, to find out what precisely happens. Thatis when the lame-duck Congress takes up the issue in earnest.
 
Many states are "in budget limbo," the Tax Foundation says in a new report, "How Would Expiration of Bush-Era Tax Cuts Affect State and Local Budgets? As Stateline as previously reported , tax codes in many states are intertwined with federal laws in complex ways that could force state revenues up or down, depending on the state. And because of that, "earthshaking changes in Washington cause waves downstream in state capitals," says Mark Robyn, author of the Tax Foundation's report.
 
The Tax Foundation says that those state income tax systems that piggyback off federal income taxes will see an automatic uptick in revenue if the Bush tax cuts expire. But a handful of states that allow taxpayers to deduct for federal income taxes paid will likely see a revenue loss.

In Iowa, for example, an expiration of all tax cuts would result in nearly $36 million in lost revenue for the current fiscal year, ballooning to $124 million in 2012 and $118 million in 2013, the Iowa Independent reported .  If congressional Democrats have their way and just those cuts on the highest earners expire, the state will  see only about a $6 million drop in revenue this fiscal year, followed by nearly $30 million in 2012 and 2013, the paper said.

Other states that allow taxpayers to deduct federal taxes paid from their state tax liability and stand to lose revenue include Alabama, Louisiana, Missouri, Montana and Oregon.

Generally, President Obama has proposed extending most of the Bush-era tax cuts that affect families making less than $250,000 ($200,000 for a single filer). But Republicans are pressing for an extension of all the tax cuts.
 
One set of calculations deals with the federal estate tax, to which many state tax codes are linked. The Bush tax cuts gradually phased out the federal estate tax until it was fully repealed in 2010, but the tax is scheduled to revert to its 2001 level unless Congress intervenes. If Congress does nothing, the estate tax rate goes to 55 percent with a $1 million exemption.
 
California's nonpartisan Legislative Analyst's Office estimates that the state stands to collect about $2.7 billion if Congress lets the estate tax go back to 2001 law. But "there has ... been significant speculation that Congress will change estate tax law to eliminate the state's ability to generate any of these revenues," the LAO's report said. "Should Congress do this, the budget problem for 2011-12 would increase by $2.7 billion above the level indicated in our forecast," the LAO said. That would put the state's projected deficit at more than $28 billion.
 

Meanwhile, Bloomberg reported that some Democrats in Congress doubt an accord on the Bush-era tax cuts can even be reached this year. "The big question mark is if Congress doesn't approve the tax cuts before the end of the year," says Ronald Alt, a senior research associate for the Federation of Tax Administrators, a nonprofit that represents state tax-collection agencies. He says the uncertainty could prompt investors to hurry and sell their stocks at the end of this year since a higher capital gains tax could go into effect if Congress doesn't act.