New Report: Bush Tax Cut Expiration Effects on the States

November 23, 2010

We’ve released a new report looking at how the expiration of the Bush tax cuts could affect state and local governments’ budgets. Authored by Tax Foundation Staff Economist Mark Robyn, the report is Special Report, No. 187, “How Would Expiration of Bush-Era Tax Cuts Affect State and Local Budgets?”
Most state tax systems are linked to the federal tax system, so earthshaking changes in Washington cause waves downstream in state capitals. 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.

Robyn explains that some states stand to lose revenue.

  • 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.

Check out the full report PDF, including state-by-state breakdowns of relevant provisions and possible top income tax rates, here.

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