TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, March 27, 2009

Stimulus Bait-and-Switch: Federal Tax Changes Will Reduce State Tax Coffers

Associated Press:  States Could Lose Billions in Taxes to Stimulus:

President Barack Obama told the nation's governors in February that the states' $229 billion share of the federal stimulus package "will ensure that you don't need to make cuts to essential services that Americans rely on now more than ever."

But while one hand of the federal government is offering Medicaid, education and other direct assistance to the states, the other hand could reduce state tax revenues by billions of dollars. That's because many states copy adjustments in the federal tax code into their own to make things less confusing for taxpayers — and the $787 billion stimulus package is heavily laden with federal tax breaks and incentives. ...

The total potential losses are hard to calculate nationwide, because many states are still figuring out how to spend their money from the recovery plan and haven't closely studied the fine print of the tax provisions. But 17 states performing essentially back-of-the-napkin calculations told The Associated Press they could lose at least a cumulative $1 billion in revenues through 2011 if their tax codes imitate the federal changes.

Across all 50 states, it's could be much higher: Tax experts interviewed by AP estimated the total losses anywhere from $4 billion to $60 billion over the next two years.

See also Oklahoma May Take $65M Hit Due to Fed Tax Code.

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Did anyone expect the stimulus bill to compensate the states for the revenue they might lose? This isn't a World Bank / Geithner type situation -- the assumption is that the states are run by responsible adults.

Posted by: TaxRascal | Mar 27, 2009 6:47:35 AM