States Blow Off Bush

While politicians in Washington have been falling over themselves to
provide huge new tax breaks to corporations and the wealthy, the story in the
states is quite different and quite heartening.

Take, for starters, states' response to the big corporate tax cut that
Congress passed in March at President Bush's insistence. By law or by custom,
almost all states -- with the notable exception of California -- follow federal
rules in their corporate income tax codes. As a result, the central provision of
Bush's so-called stimulus bill -- a vast increase in corporate depreciation
write-offs -- threatened to drain state coffers by upward of $12 billion over the
next three years.

Less than a week after Congress passed its corporate giveaway bill, however,
the GOP-dominated Virginia legislature passed a measure that "decoupled" the
commonwealth's tax code from the federal depreciation changes. Six other states,
along with the District of Columbia, quickly followed suit. In Mississippi, the
Republican tax commissioner simply ruled that the new federal depreciation
allowances were not consistent with the state's requirement that write-offs be
"reasonable."

In fact, counting states that must take positive action to conform and haven't
done so, 16 states plus Washington, D.C., have now decoupled, and another 10
states are on the verge of doing so. That means that about two-thirds of the
potential state revenue losses have probably been averted -- and that doesn't
count long-decoupled California. There's also a reasonable chance for decoupling
in another 10 states.

That leaves only eight states -- with just 9 percent of the potential losses
-- that have definitively acted to conform or allowed themselves to conform
automatically. Most of the revenue losses in this category will come in just two
states: Florida and Colorado. (In Colorado, the state's odd constitution mandates
that any law raising taxes requires approval by public referendum; in this case,
it weirdly classifies a failure to stop a $194 million corporate tax cut as a
"tax increase.")

Are state politicians really less craven, less beholden to corporate
lobbyists, than their federal counterparts? That's not a particularly plausible
theory. What's actually driving the states is more basic: They're broke and,
unlike the federal government, they're required to balance their budgets.

Spurred on by the Center on Budget and Policy Priorities, fair-tax activists
and public-employee unions pointed out to their governors and legislators that
following the federal lead on corporate tax concessions would require slashing
state programs. That, they noted, would not only be unpopular but the net effect
would almost certainly hurt state economies.

Even in Florida, clearly the most notable exception to the decoupling trend so
far, the political debate centered on exactly these issues. Legislators were
presented with considerable evidence that adopting the federal depreciation tax
break would have a negative impact on Florida's economy. Nevertheless, the
GOP-dominated Florida legislature buckled under pressure from the president's
brother, Governor Jeb Bush, and in early May voted to conform. In a graphic
illustration of why most other states did the opposite, Florida was forced to cut
the state's education budget to cover most of the $426 million cost of the
corporate tax break.

Depreciation write-offs aren't the only area where states are rejecting
President Bush's supply-side theology. The three states that used to compute
their personal income taxes as a percentage of the federal income tax -- North
Dakota, Rhode Island, and Vermont -- have restructured their tax codes to avoid
losses that Bush's 2001 income tax cuts would otherwise have imposed on them.

Finally, there's the estate tax issue. Most state estate taxes are simply a
share of the federal tax -- and heretofore have imposed no added cost on estates.
Conventional wisdom held that the phaseout of the federal estate tax enacted
last year would be the death knell for state estate taxes, too. Surprisingly,
however, six states have already rewritten their inheritance taxes so that they
won't be automatically repealed, and five other states are seriously considering
following suit. In addition, seven states that don't automatically conform to the
federal phaseout have thus far refused to do so.

State actions to reject federally imposed tax cuts are not unprecedented. In
the early 1980s, Ronald Reagan's huge increase in corporate depreciation
write-offs threatened to slash state revenues by tens of billions of dollars. But
a campaign by Citizens for Tax Justice (CTJ) helped persuade most states,
including Florida, to reject Reagan's corporate giveaways.

The arguments back then were the same as they are today. "Ronald Reagan can
disguise his tax giveaways to big business by running up hundred billion dollar
deficits," a CTJ press release noted at the time. "The states don't have that
luxury."

So the lesson here is a simple one. Given a clear choice between public
programs and tax cuts, especially regressive ones, politicians and voters will
more often than not choose programs. That's why fervid tax cutters -- from Bush
on down -- so assiduously deny that such a trade-off exists.

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