May 9, 2003
STATES COULD LOSE $8
BILLION TO $11 BILLION OVER TEN YEARS
AS A RESULT OF SENATE
FINANCE COMMITTEE PROPOSAL
By Iris J. Lav and
Nicholas Johnson
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The Senate Finance Committee “mark” as revised by Chairman Charles Grassley exempts from taxation up to $500 in dividends per tax return, plus an additional one-tenth of dividends over $500 received in 2004 through 2007 and two-tenths of dividends over $500 received in 2008 through 2012. The provision would expire at the end of tax year 2012.
Over the period in which it is in effect, the exemption would deprive states of roughly $8 billion to $11 billion in state revenues over the next 10 years.
States have closed or are in the process of closing deficits for state fiscal year 2003 that totaled nearly $80 billion, along with deficits for fiscal year 2004 that exceed $70 billion. These deficits have been closed by a combination of depleting reserves, raising taxes, and cutting needed programs such as education and health insurance for low-income families. Most observers expect state fiscal problems to continue in fiscal year 2005, and further rounds of tax increases and program cuts will be made as states struggle to meet their balanced budget requirements.
Some 37 states and the
Under the Senate Finance Committee
proposal, states would be in jeopardy of losing $8 billion to $11 billion
in revenue, with the actual amount of loss depending on which states
conformed to the federal treatment.
Revenue Loss |
Revenue Loss |
||
|
|||
Alabama |
$113 |
Missouri |
$253 |
Arizona |
134 |
Montana |
67 |
Arkansas |
126 |
Nebraska |
81 |
California |
3,019 |
New Hampshire |
71 |
Colorado |
201 |
New Jersey |
253 |
Connecticut |
248 |
New Mexico |
59 |
Delaware |
58 |
New York |
1,464 |
Georgia |
341 |
North Carolina |
389 |
Hawaii |
80 |
North Dakota |
13 |
Idaho |
63 |
Ohio |
465 |
Illinois |
371 |
Oklahoma |
104 |
Indiana |
126 |
Oregon |
256 |
Iowa |
172 |
Pennsylvania |
346 |
Kansas |
134 |
Rhode Island |
62 |
Kentucky |
133 |
South Carolina |
169 |
Louisiana |
130 |
Tennessee |
190 |
Maine |
88 |
Utah |
79 |
Maryland |
249 |
Vermont |
47 |
Massachusetts |
440 |
Virginia |
375 |
Michigan |
333 |
West Virginia |
49 |
Minnesota |
310 |
Wisconsin |
281 |
Mississippi |
51 |
District of Columbia |
85 |
|
Total |
12,076 |
|
Total: States that currently use federal taxes as basis for taxing dividends $11.0 billion Total: States that currently use federal taxes as basis minus California $8.0 billion Total: All states that tax dividends $12.1 billion |
Notes:
States in italics tax dividends, but do not
derive the amount of dividends to be taxed from the federal tax form.
Some other states, such as
These estimates are based on Joint Committee
on Taxation’s estimate that the Finance Committee provision would cost the
federal treasury $80.5 billion and on the rule of thumb that, if all
states with income taxes conform to a federal tax change, the impact on
states equals about 15 percent of the federal impact. The state-by-state
numbers are based on information on taxable dividend income by state from
the Internal Revenue Service, Statistics of Income Bulletin, Spring
2002. The dividend income reported in the SOI was adjusted to remove
interest payments from mutual funds that the IRS requires to be reported
as dividends, and to include personal trust dividend income that is
reported elsewhere. See William G. Gale, “About Half of Dividend Payments
Do Not Face Double Taxation,” Tax Notes,