As state and local governments scramble to understand the full implications of the Republican tax bill signed into law last month, analysts are finding that many states could end up collecting more tax revenues this year.
The reason is that most state tax systems conform at least in part to the federal system (the Tax Foundation has a rundown on individual state conformity here). The recent tax overhaul broadened the fiscal base, primarily by eliminating deductions, so that more income was exposed to taxation even as rates got lowered. But states set their own income tax rates, and if they adopt the bill’s base-broadening changes without lowering their rates, taxpayers will end up paying more at the state level.
The revenues involved are substantial. Maryland, for example, could collect $450 million more in state taxes and $300 million more in local taxes each year as a result of the new rules, according to The Hill.
The final effects for most states are still up in the air, however, since each state’s tax code is different and legislators may create new rules to limit or even eliminate the effects of the federal overhaul.
Lawmakers face two basic options: Use whatever windfall occurs to boost spending, or cut taxes to reduce revenues. The end result could be a replay of the recent federal battle over taxes in state capitals all over the country. “Now we get to do tax reform in all 50 states,” Nicole Kaeding of the Tax Foundation said.