House Stimulus Package Could Prove Costly to States

With almost every state seeing declining revenues in light of the recession and Sept. 11 attacks, projections from the Center for Budget and Policy Priorities that the economic stimulus package passed by the House on Wednesday could further reduce states’ revenues by as much as $5 billion for each of the next three years may further exacerbate the problem. The Center, releasing its analysis of the House stimulus package on Monday, suggests the losses in revenues could compel states to institute still-larger program cuts or tax increases that would partially offset and thereby weaken the federal stimulus goals. 



The single biggest tax-cut item in the Ways and Means bill is a provision that allows brief expensing of business investments. This provision would allow firms to subtract immediately 30 percent of the cost of new investments in equipment or similar business property, rather than depreciating the costs of these investments over a number of years as under current law. 



Most states use federal rules on expensing and depreciation in the calculation of their own state corporate and other business income taxes, the Center explains. Of the 45 states that have corporate income taxes, 44 – all but California – conform to the federal rules. As a result, 44 states and the District of Columbia would experience revenue losses averaging $5 billion per year if this provision becomes part of federal law. 



Some states would lose additional revenues, the Center points out, because their tax systems conform to federal treatment of net operating losses and/or levy a corporate Alternative Minimum Tax (AMT) that piggy-backs on the federal corporate AMT. The House bill makes net operating loss provisions more generous and repeals the corporate AMT. 



States also are preparing for the first impacts of the tax cuts passed earlier in the year by Congress. The combined revenue loss to states as a result of the phase-out of the credit for state estate and inheritance taxes will be approximately $1.9 billion in federal fiscal year 2003 and $3.5 billion in 2004, according to the Center. 



More information is available at: http://www.epn.org/whatsnew/full_cite/1471.html