National Council of Nonprofits: Federal-State Budget and Tax Interplay

State lawmakers are now grappling with the uncertainty of the economy and policies in general as they formulate their state budgets. Twenty-five states, mostly in the Northeast, Midwest, and those reliant on oil and natural resource revenues, are facing budget shortfalls in varying degrees, ranging from small declines to major deficits that will require significant policy changes to resolve. For example, New York faces a $1.7 billion budget shortfall, its largest gap in more than five years, and Louisiana is looking at a $1 billion deficit.

Every state (except Vermont) must balance its state budget by fiscal year end, which is June 30 for most states, so they have little time to adjust to bring in new revenues and/or cut spending.

Adding further complications to balancing budgets are how state tax codes interact with the new federal tax law. A Tax Foundation report found, “Some states adopt large swaths of the federal tax code by reference; others use it as a starting point, then tinker endlessly; and still others incorporate federal provisions and definitions more sparingly.” As a result of the new federal tax law and this interplay with state law, several state governments will see increased revenues and some, including Montana and Oregon, should expect reduced tax receipts. Increased state revenues mean state taxpayers will automatically be paying higher state taxes, and policymakers, many of whom are up for re-election, are proposing tax cuts. For instance, many taxpayers in Maryland may owe more in state and local taxes as a result of the new federal law, yet the Governor is vowing to find ways to avoid that consequence. Missouri’s Governor is proposing nearly $800 million in state tax cuts reportedly to balance out the interplay of the federal and state tax laws.

Vermont economists estimate $38 million in additional revenues due to the tax law, but caution that the state is one of the least prepared states for the next recession.


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