Weekly Round-Up: What Obama’s Budget Proposal Will Mean for States

As legislative sessions kick into high gear, some states have updated their conformity to the Internal Revenue Code. Meanwhile, President Obama has released his proposed budget for 2013, which contains some key tax changes that could affect state coffers.

On the state front, Virginia Gov. Bob McDonnell (R) signed legislation, effective Feb. 7, that advances the date as of which his state’s income tax laws conform with the Internal Revenue Code from Dec. 31, 2010, to Dec. 31, 2011. Similarly, Gov. Dennis Daugaard (R) signed legislation, effective July 1, 2012, advancing the date South Dakota conforms with the Internal Revenue Code, for purposes of the bank franchise tax, from Jan. 1, 2011, to Jan. 1, 2012.

At the federal level, Obama’s proposed budget for 2013 may not trigger many changes in state tax codes, but it may have an impact on state tax collections. A summary of key tax changes in Obama’s budget, by Elizabeth Karasmeighan, a Tax Policy Analyst at Bloomberg, can be read here.

If the final version of the budget results in higher tax bills for high-income taxpayers, some states may see a reduction in revenues. This is because a few state income tax systems allow the deduction of federal income tax in determining state taxable income, explained Nick Kasprak, an analyst with the Tax Foundation. Higher federal income tax collections, as called for by the President’s budget, would increase the value of this deduction and reduce state revenues, he said.

Additionally, some state income tax systems have definitions of taxable income that are tied to the federal definition. Obama’s budget brings back the so called “Pease limitation” on itemized deductions for high income taxpayers, which reduces the allowed amount of itemized deductions, and that increases a taxpayer’s taxable income, Kasprak said. States whose definition of taxable income is tied to the federal one will see increased revenues as a result, according to Kasprak.

In other developments…

Michael Cooper, of the New York Times, explains how Oakland is turning to medical marijuana dispensaries to raise revenueand how other states are approaching this potential cash stream. For example, in Maine, medical marijuana is taxed at the 5 percent sales tax — unless the marijuana is baked into brownies, in which case, it is taxed at a higher 7 percent rate that the state levies on prepared foods, Cooper explains.

Howard Gleckman, at the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, looks at whether states should use tax breaks to woo seniors.

Amy St. Clair, at PwC, reviews 2012 trends in sales and use tax nexus expansion.

Scott Drenkard, of the Tax Foundation, releases Tax Foundation Fiscal Fact No. 291, State and Local Sales Raxes in 2012.

Compiled by Priya D. Nair
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