A report by the Pew Center on the States on 11/15/12 notes that the fiscal cliff the federal government is facing also affects the states. They note that with state tax systems usually tied closely to the federal tax rules, expiration of federal tax cuts will also result in higher state taxes for taxpayers and greater collections for the states. But it will also result in a larger contraction of the economy than we are hearing about when only the federal picture is considered. Pew also notes though that six states allow for a deduction of federal taxes and they would see a reduction in state taxes because of the impending higher amount of federal taxes many people will have in 2013.
Sequestration at the federal level may reduce certain grants and other funds that states receive.
Also see "Without a Cliff Deal, States Will Bleed Red Ink, by Pianin and Ehley in The Fiscal Times, 11/16/12.
I encourage you to review the Pew report to learn what the possible impact of the federal fiscal cliff is for your state. The federal-state fiscal cliff connection is also a reminder that there is a connection between federal and state tax rules and systems that is relevant for tax reform.
For example, in discussing base broadening at the federal level to allow for continued lower rates, a few of the items will have direct and indirect impacts on state budgets. For example, if some portion of tax-exempt interest income becomes taxable, state and local governments will most likely find they need to offer higher interest rates. Also, cut back of the low-income housing credit or new markets credit will have indirect unfavorable effects on state and local governments who are indirect beneficiaries of these federal rules.
Ideally we'll see Congress reach out to the state and vice versa as tax reform activities ramp up in the 113th Congress.
What do you think?
