While politicians in Washington have been falling over themselves toprovide huge new tax breaks to corporations and the wealthy, the story in thestates is quite different and quite heartening.
Take, for starters, states' response to the big corporate tax cut thatCongress passed in March at President Bush's insistence. By law or by custom,almost all states -- with the notable exception of California -- follow federalrules in their corporate income tax codes. As a result, the central provision ofBush's so-called stimulus bill -- a vast increase in corporate depreciationwrite-offs -- threatened to drain state coffers by upward of $12 billion over thenext three years.
Less than a week after Congress passed its corporate giveaway bill, however,the GOP-dominated Virginia legislature passed a measure that "decoupled" thecommonwealth's tax code from the federal depreciation changes. Six other states,along with the District of Columbia, quickly followed suit. In Mississippi, theRepublican tax commissioner simply ruled that the new federal depreciationallowances 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'tdone so, 16 states plus Washington, D.C., have now decoupled, and another 10states are on the verge of doing so. That means that about two-thirds of thepotential state revenue losses have probably been averted -- and that doesn'tcount long-decoupled California. There's also a reasonable chance for decouplingin 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 conformautomatically. Most of the revenue losses in this category will come in just twostates: Florida and Colorado. (In Colorado, the state's odd constitution mandatesthat 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 corporatelobbyists, than their federal counterparts? That's not a particularly plausibletheory. 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 activistsand public-employee unions pointed out to their governors and legislators thatfollowing the federal lead on corporate tax concessions would require slashingstate programs. That, they noted, would not only be unpopular but the net effectwould almost certainly hurt state economies.
Even in Florida, clearly the most notable exception to the decoupling trend sofar, the political debate centered on exactly these issues. Legislators werepresented with considerable evidence that adopting the federal depreciation taxbreak would have a negative impact on Florida's economy. Nevertheless, theGOP-dominated Florida legislature buckled under pressure from the president'sbrother, Governor Jeb Bush, and in early May voted to conform. In a graphicillustration of why most other states did the opposite, Florida was forced to cutthe state's education budget to cover most of the $426 million cost of thecorporate tax break.
Depreciation write-offs aren't the only area where states are rejectingPresident Bush's supply-side theology. The three states that used to computetheir personal income taxes as a percentage of the federal income tax -- NorthDakota, Rhode Island, and Vermont -- have restructured their tax codes to avoidlosses 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 ashare of the federal tax -- and heretofore have imposed no added cost on estates.Conventional wisdom held that the phaseout of the federal estate tax enactedlast year would be the death knell for state estate taxes, too. Surprisingly,however, six states have already rewritten their inheritance taxes so that theywon't be automatically repealed, and five other states are seriously consideringfollowing suit. In addition, seven states that don't automatically conform to thefederal phaseout have thus far refused to do so.
State actions to reject federally imposed tax cuts are not unprecedented. Inthe early 1980s, Ronald Reagan's huge increase in corporate depreciationwrite-offs threatened to slash state revenues by tens of billions of dollars. Buta 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 candisguise his tax giveaways to big business by running up hundred billion dollardeficits," a CTJ press release noted at the time. "The states don't have thatluxury."
So the lesson here is a simple one. Given a clear choice between publicprograms and tax cuts, especially regressive ones, politicians and voters willmore often than not choose programs. That's why fervid tax cutters -- from Bushon down -- so assiduously deny that such a trade-off exists.
