Because state tax codes are linked to the federal tax code in various ways, many of the expiring I.R.C. provisions that comprise the so-called fiscal cliff will have a mixed impact on state coffers, according to a recent report by the Pew Center on States.
States will be harmed by a tumble off the cliff to the extent that higher federal tax rates or reduced aid dampen state economies.
But states will benefit from the cliff to the extent that expiring federal tax breaks result in greater tax revenues. This is because for most states, the computation of corporate and individual income tax begins with federal adjusted gross income. From there, each state has its own modifications in the form of additions and subtractions that a taxpayer must make to this figure.
As a result, a higher federal adjusted gross income as a result of tax breaks scheduled to expire in 2013, will likely produce higher state tax liabilities as well.
One example of this is the federal treatment of bonus depreciation. In 2012, a taxpayer may take an additional first-year depreciation deduction equal to 50 percent of the property’s adjusted basis for qualified property acquired after Dec. 31, 2007, and before Jan. 1, 2013. If this provision is allowed to expire on Jan. 1, 2013, the states that conform to it will no longer offer the tax break.
example is the federal enhanced expensing provisions. In 2012, a taxpayer may
expense up to $139,000 of the cost of §179 property. But beginning, Jan. 1,
2013, if this provision is allowed to expire, the taxpayer may expense only up to
By Steven Roll
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