Stimulus Law Gives Cash Injection to States, but Tax Breaks Might Empty Depleted Coffers

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

By Steven Roll

The billions in aid states will receive under the American Recovery and Reinvestment Act (H.R. 1) signed into law by President Obama Feb. 17 will provide much needed relief to jurisdictions struggling with nearly empty coffers and massive budget shortfalls. [H.R. 1, enacted 2/17/09]

The $787 billion spending and tax relief package includes $286.5 billion in federal tax relief, with $232 billion in tax breaks aimed at individuals and families, and $13 billion targeting business, according to a Feb. 18 Webinar by Ernst & Young LLP about the federal stimulus legislation.

The billions of aid going to the states may help them avoid raising taxes, Ernst & Young's Steve Starbuck said during the Webinar. But, he added, it is unclear how many states will conform their tax code to changes included in the Act.

Billions more in federal tax breaks are available in the form of energy tax incentives, and tax relief associated with tax-exempt bonds.

The President and Congress cannot be accused of failing to act, but the jury is still out on the plan's effectiveness, Tom Neubig, an economist with Ernst & Young said.

In a Feb. 18 media conference call held by the National Conference of State Legislatures, the group noted that “some 43 states are reporting cumulative budget shortfalls of $183 billion for fiscal year 2009.”

The aid from the stimulus package will help states keep workers on the payroll. The billions designated for education will save approximately 267,000 teaching positions in 2009, an NCSL spokesman said.

The additional money going to state medicaid programs will help states keep the personnel needed to keep up with the increased demand for food stamps, a speaker said.

Tax Breaks for Businesses, Individuals

The Webinar detailed the amounts appropriated for many of the tax breaks for individual and business taxpayers.

Business tax breaks include:

• $5.1 billion for the one-year extension of the 50% bonus depreciation and increase in the $250,000 I.R.C. § 179 limit;
• $0.8 billion for the one-year extension of the election to accelerate use of certain AMT and R&D credits in lieu of bonus depreciation;
• $0.950 billion for the five-year net operating loss carryback for 2008, applicable to NOLs for companies with gross receipts of $15 million or less;
• $1.6 billion for the deferral and ratable inclusion of certain discharge of indebtedness income; and
• $0.3 billion for the one year delay in onset of 3 percent withholding on government contracts.
The federal tax breaks for individuals and families include:
• $116 billion for the Making Work Pay Credit,
• $70 billion for the individual alternative minimum tax patch for 2009,
• $19.5 billion to increase the Earned Income Tax Credit and expansion of the Child Credit,
• $14 billion for the Tuition Tax Credit,
• $6.6 billion to extend and modify first-time home buyer credit,
• $5 billion for the exclusion up to $2,400 unemployment benefits from income, and
• $1.7 billion for the sales tax deduction for certain vehicle purchases.

History Suggests States Will Decouple

The states have different methods for conforming their tax codes to federal changes, Starbuck said. Of the states that impose an income tax, he noted that:

• 21 states automatically conform to the current version of the federal tax code,
• 21 states conform to the I.R.C. as of a specific date, and
• 5 states only conform selected provisions of their tax code to federal law.

A state may opt out of the stimulus bill's tax provisions regardless of the method it uses to conform to the I.R.C., Starbuck added.

If history is any guide, many states are likely to decouple from some or all of the provisions. Thirty-two states decoupled from the 2008 bonus depreciation provisions, Starbuck said.

He also noted that only seven states conform to federal NOL rules. California recently temporarily suspended the availability of NOLs, he noted.