Much of the debate about potential expiration of the “Bush tax cuts” has focused on the impact on federal revenue and the national economy.
Now the Tax Foundation has released a new report focusing on the impact on state and local budgets. Among the key findings:
? Many state income tax systems piggy-back off the federal income
tax. Due to potential changes in federal taxable income, adjusted gross
income, child tax credits and earned income tax credits, states that are
linked closely to the federal tax code will see an automatic uptick in
revenue if the Bush tax cuts expire.? The handful of states that allow a deduction for federal income
taxes paid are likely to see a revenue loss if federal income taxes
increase, even after accounting for other revenue-increasing effects.? “Interactive” effects from the expiration of the Bush tax cuts,
either in January 2011 or some later date after a temporary extension,
include a decrease in the value of the federal deduction for state and
local taxes; a reduction in state revenues due to shrinking income and
sales tax bases; and changes in tax planning by filers.? If the federal estate tax returns there would be an automatic
return of the estate tax in many states that are linked to the federal
estate tax.? Congress’s actions on the Bush tax cuts could affect the federal
and state budget conditions in the long term. We briefly discuss the
consequences for states of a possible federal value added tax, the
possibility that declining federal credits could hurt the states’
ability to borrow, and the potential macroeconomic impacts of Congress’
handling of the Bush tax cuts.