Fiscal Fallout for States if Bush Tax Cuts Expire

Congress is continuing to debate whether to extend the Bush-era tax cuts or allow them to expire (some are set to end starting Dec. 31 of this year). But let's forget for a minute whether you think the cuts themselves are a good idea, and look at a different question: How will states be affected?

About a quarter of the states peg their tax laws to the federal code in such a way that they'd be affect changes in these tax cuts. If all of the cuts are extended, of course, states would maintian the status quo.

But if some of the cuts are allowed to expire, some states would benefit. Others would suffer.

So who wins and who loses? From Stateline:

The first group stands to gain revenue if some or all of the tax cuts expire. This group includes nine states: Idaho, Minnesota, North Carolina, North Dakota, Oregon, South Carolina, Utah and Vermont. These states collect state taxes based on federal taxable income, as opposed to adjusted gross income. If the tax cuts expire, some increased deductions would go away and taxpayers would see their federal taxable incomes go up — and in these nine states, people would pay more in state taxes, as well.

Were that to happen, these states would have to decide if they want to keep the windfall. They could make adjustments that would give the extra revenue back to taxpayers. But most of these states are running big budget deficits, and keeping things put would allow them to raise revenues without legislators having to vote on a tax increase. [...]

The second group of states stands to lose revenue if some or all of the Bush tax cuts expire. These states allow taxpayers to deduct federal taxes paid from their state tax liability. So when federal taxes go up, state revenues will go down. Eight states are in this group — Alabama, Iowa, Louisiana, Missouri, Montana, North Dakota, Oklahoma and Oregon — although North Dakota and Oregon fall into both groups, so some of the impacts potentially may offset each other.

Of course, the "loser" states could close the gap by rewriting their code to reduce the state tax deduction for federal taxes paid. But that could be a very hard sell politically: It could easily be painted as pushing for a state tax increase on top of a federal one.