How Much Revenue Will the Corporate Tax Reductions in the House Bill and Senator Baucus' Stimulus Packages Cost Each State?, 10/24/01

How Much Revenue Will the Corporate Tax Reductions in the House Stimulus Bill and Senator Baucus’ Stimulus Package Cost Each State?
by Iris J. Lav and Nick Johnson

PDF of report

If you cannot access the files through the links, right-click on the underlined text, click "Save Link As," download to your directory, and open the document in Adobe Acrobat Reader.

A business tax cut in the stimulus package that passed the House of Representatives October 24 would reduce state revenues by approximately $15 billion over the next three years. A similar, but much smaller, provision proposed by Senator Baucus would reduce state revenues by about $2 billion in the coming year.

These reductions in state revenues would come at a time when a growing number of states are falling into fiscal crisis and, because of balanced budget requirements, are being forced to cut programs and/or raise taxes during the downturn. At least 15 states are already facing negative revenue growth in the current fiscal year, and 28 states have announced plans for program cuts in anticipation of large deficits. If the state revenue losses that would result from either of these proposals compelled states to institute still-larger program cuts or tax increases, as would likely be the case, that would partially offset and thereby weaken the federal stimulus policies.

The revenue losses that would result from each of these proposals at the state level are quite large. New York, for example, could lose as much as $270 million or more in the coming year under Senator Baucus' version; New York would lose $700 million in each of the next three years — for a total of about $2.1 billion — under the House provision. Even in smaller states, the loss in revenue would be significant; a loss of $5 million or $10 million in a small state can pose significant problems, especially if a state already is experiencing fiscal distress.

The House provision in question allows partial 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 when figuring their federal tax liabilities, rather than depreciating the costs of these investments over a number of years as under current law. This provision would be in effect for the next three years. The Joint Committee on Taxation estimates that it would reduce federal revenues by $39 billion in 2002, $36 billion in 2003, and $30 billion in 2004.

Senator Baucus' proposal has a comparable, although smaller, "bonus depreciation" provision to allow firms to subtract 10 percent of the cost of new investments put in place over the next year. Senate Finance Committee staff estimate the cost to be $15 billion in 2002.⁽¹⁾

Most states use federal rules on expensing and depreciation in the calculation of their own state corporate and other business income taxes. Of the 45 states that have corporate income taxes, 44 — all but California — conform to the federal rules. As a result, 44 states would experience significant corporate revenue losses if either of these provisions becomes part of federal law. A 45^th state, Michigan, would also lose some individual income tax revenue. These 45 states would stand to lose an average of approximately $5 billion a year in corporate and individual income tax revenues in each of the three years the House provision would be in effect as a result of their conformity to federal expensing and depreciation rules. The Baucus proposal would cost states about $2 billion in corporate and individual income tax revenues.

Below are state-by-state estimates of the loss in revenue under the House provision and under the provision that Senator Baucus has proposed. The estimates are based on each state's share of total state corporate and individual income tax revenue over the last two years. Note that the House version would be in effect for three years, while Senator Baucus' version would be in effect for one year. Because corporate tax revenue can be quite volatile, varying by 20 percent or more from one year to the next, these estimates should be considered approximate.

Estimated Loss of State Tax Revenue Due to Stimulus Proposals, By State, in Millions of Dollars

	House (each year for three years)	Baucus Proposal (one year)		House (each year for three years)	Baucus Proposal (one year)

Alabama	$55	$21	Montana	$21	$8
Alaska	68	26	Nebraska	33	13
Arizona	106	41	Nevada	not affected
Arkansas	52	20	New Hampshire	42	16
California	not affected		New Jersey	257	98
Colorado	85	33	New Mexico	39	15
Connecticut	97	37	New York	700	270
Delaware	30	12	North Carolina	190	73
Florida	210	79	North Dakota	15	6
Georgia	170	66	Ohio	190	73
Hawaii	20	8	Oklahoma	47	18
Idaho	30	12	Oregon	100	38
Illinois	350	140	Pennsylvania	270	100
Indiana	180	67	Rhode Island	18	7
Iowa	59	23	South Carolina	56	22
Kansas	55	21	South Dakota	not affected
Kentucky	72	27	Tennessee	106	41
Louisiana	56	21	Texas	330	120
Maine	29	11	Utah	43	16
Maryland	115	44	Vermont	11	4
Massachusetts	260	100	Virginia	130	51
Michigan	58	22	Washington	not affected
Minnesota	170	66	West Virginia	35	13
Mississippi	54	21	Wisconsin	140	52
Missouri	86	33	Wyoming	not affected
Center on Budget and Policy Priorities.

1. The costs of both the House version and Senator Baucus' version would be much lower over ten years than in the short term, because the deductions that corporations would claim now would be offset by lower deductions in future years. This future revenue gain is of no help, however, for states that must balance their budgets now.