Stimulus may hit states’ tax revenues

RALEIGH, N.C.

President 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 changes could dwindle revenues at a time when states are facing their own fiscal crises.

“We have to balance our budget and the federal government doesn’t,” said Sen. David Hoyle, a co-chairman of the North Carolina Senate’s Finance Committee. “So they can spend at length what they want and print more money. We can’t.”

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 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.

Even at the high end, that’s well short of the estimated $244 billion in budget gaps facing states through next year, according to the Center on Budget and Policy Priorities. But it comes at a time when every bit counts and could force some states into cuts they’d hoped the stimulus money would avert.

“There will be both economic and political judgments being made,” said Jim Eads, executive director of the Federation of Tax Administrators, representing local taxing authorities and revenue departments.

The states that should feel the biggest hit are those with individual and corporate income taxes that adopt changes to the federal code. Among these are about 35 states that use a taxpayer’s federal gross income or adjusted income as the basis for determining state tax payments.

By contrast, a handful of states with no income tax or corporate tax - such as Nevada, Washington or Wyoming - shouldn’t be harmed much.

Legislative analysts in North Carolina report the greatest potential loss, about $320 million. Kansas officials said they could face $90 million in lost revenues and Michigan $89 million.

“It’s one more piece to this growing, complicated puzzle,” said Glenn Coffee, leader of the state Senate in Oklahoma, which faces a $900 million shortfall and could lose $65 million in state funds due to the tax code changes.

The tax-reducing measures in the stimulus package passed by Congress and signed by Mr. Obama include:

• The exemption from federal taxes of the first $2,400 of a person’s unemployment benefits

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