Report: Some States to Gain Revenue If Bush Tax Cuts Expire; Others Will Collect Less
Washington, DC, November 22, 2010 - State and local government budgets are in suspense over the expiring Bush tax cuts, according to a new report from the Tax Foundation. "Most state tax systems are linked to the federal tax system, so earthshaking changes in Washington cause waves downstream in state capitals," observes Mark Robyn, author of Tax Foundation Special Report, No. 187, "How Would Expiration of Bush-Era Tax Cuts Affect State and Local Budgets?" (Full report at http://www.taxfoundation.org/research/show/26852.html. Many states would see more revenue if all the Bush-era tax cuts expire. Some of the reasons include:
- Linkage to federal AGI: expiration would cause AGI to grow, resulting in more taxable income at the state level;
- Linkage to taxable income: if child credits, earned income credits and itemized deductions shrink in value, taxable income will rise, raising state revenue.
- Linkage to revived federal estate tax: some states that have done without estate tax revenue since 2005 will once again pick up the revived state estate tax credit under a full-expiration scenario.
- Federal deductibility: some states allow taxpayers to deduct what they pay to the federal government on their state tax returns. If federal payments rise, state deductions will grow.
- States highly dependent on sales taxes may lose revenue as rising federal tax payments leave their consumers with less disposable income to buy taxable products and services. And those are the same states where the expiring federal tax deductions for sales tax paid would hurt the most.