Tax reform: new resolutions
MANY Americans are scrambling right now to write last-minute checks for charitable donations, realize long-term capital gains, and otherwise act to get the most out of various tax breaks before they shrink or disappear when federal tax reform becomes effective Jan. 1. As they do, they may want to give a moment's thought to their state tax situation. A new study by the Advisory Commission on Intergovernmental Relations in Washington projects a tax-reform windfall for more than two dozen states.
These states can expect to see their revenues from state personal income taxes rise this coming year, basically because they peg their income tax provisions, including deductions, to the federal tax code. The federal tax reform removed or modified many tax breaks in return for lower rates. Many of these breaks will disappear from the state codes as well - but the state rates will not necessarily go down.
For some states the windfall is welcome and needed. Louisiana, for instance, severely hit by the oil slump, is projected to see its personal income-tax revenues go up some 28 percent - the highest such increase among the states. Oklahoma, a similarly strapped energy state, appears likely to get an 18 percent hike in income-tax revenue.
But it's worth noting that in some of these instances, the personal income tax was never that important a revenue source. Louisiana's 28 percent projected increase, for instance, looks less significant when one understands that personal income tax has provided only some 11 percent of state revenues anyway. And Texas, another energy state that could use an infusion of funds, has no personal income tax at all.
Still other states will see their personal income tax revenues go down, because their residents pay state taxes calculated as a percentage of federal tax liability, which for many individuals will decline as more of the federal tax burden is shifted to corporations. More states will be getting windfalls, however, than will face revenue losses, and the windfalls will be much bigger than the losses.
In any case, state legislatures owe it to their citizens to face the windfall issue candidly. It will be enormously tempting for them to sit still and watch the extra money roll in. Some of them will surely hope their constituents won't be fully aware of what's happening. There may be sound reasons to retain current tax rates. But those reasons should be straightforwardly set forth. The issue should be a matter of informed decision, not default.
It's hard to make a really strong case for the federal tax reform program as notably fairer or simpler. The bill was perhaps most remarkable for the bipartisan love-ins on Capitol Hill as each step of the legislative process was successfully negotiated. Even many who are likely to realize an overall tax cut regard the changes with a certain skepticism.
Taxpayers will presumably learn to exploit the new tax code as they learned to do the old one - by borrowing excessively against their home equity, rather than running up excessive credit card balances, for instance. Meanwhile, it does nothing for public confidence in the political process, let alone the tax system, for citizens to feel that what Uncle Sam giveth, in the way of tax cuts, the states will take away.