States Lose Billions in Senate Tax Plan, Analyst Says

States could lose some $40 billion a year in lost tax revenue through 2013 under the tax package the Senate approved May 15, nearly double the $20 billion in “relief” the bill would give the states, a liberal think tank said Friday.

Ironically, the House tax package and President Bush’s own tax proposal would cost the states less than the Senate version, even though the Senate plan is the only one that specifically has provisions to help fiscally-strapped states, said Robert Greenstein, the executive director of the Center on Budget and Policy Priorities, a liberal policy center that focuses on budget issues affecting the poor.

The reason the $350 billion Senate measure is such a bad deal for the states, Greenstein said, is because it would exempt stock dividends from taxable income. Most states use federal definitions of income in their own tax systems. That means, these states would automatically have to exclude dividends from state taxable income if they are excluded from federal taxable income, Greenstein said in a conference call with reporters in Washington.

States would have to pass legislation to “de-link” their state tax provisions from the federal in order to collect taxes, Greenstein said. “The same pressures that are being brought to bear to push for a dividend exclusion at the federal law also exist in state capitols,” he said. That would be a daunting task for most states, he said.

On a yearly basis, the Senate tax package would cost states just under $5 billion a year in lost revenue while the president’s tax plan would mean about $4 billion less for states a year, Greenstein said. The House tax package would cost states under a $1 billion a year, he said.

The reason states would fare better under the House version is because the House plan does not exclude capital gains income or dividends income from taxable income, he said. But rather, the House plan taxes capital gains and dividend income at a lower the rate. That would not affect state tax codes, he said.

“There is actually a quite large difference in terms of the impact on state budgets between the House bill on the one hand and both the administration and Senate on the other,” he said.