Tax Provisions

Proposal

White House

House Democrats

Senator Baucus

Eliminating double taxation of corporate dividends

Eliminate personal income taxes on dividends that are also taxed at the corporate level. This would be accomplished through a combination of excludable dividend accounts to ensure that dividends are taxed exactly once and a capital gains tax cut for reinvested earnings to eliminate a bias in favor of dividends over reinvestment.

No provision

No provision

Implications for the states: Every state with a personal income tax on dividends would incur a cost to conform. States' ability to avoid the revenue loss by not conforming would depend on the final federal language and how this would alter the federal Form 1099 DIV, which states rely on in administering their own income taxes. (For a broader explanation of state conformity to the federal tax code, see The Impact of Federal Tax Changes on States.)

The Federation of Tax Administrators has estimated that the cost for states to eliminate their personal income tax on dividends woul d be $4 billion in 2003 and $48 billion over ten years. The Center on Budget and Policy Priorities has estimated the first-year cost at $4.5 billion. These estimates were based on early reports that the president's proposal would repeal the personal income tax on dividends. Determining the potential cost of eliminating double taxation through a combination of dividend exclusions and a capital gains tax cut for reinvested earnings, which would require assumptions about corporate reinvestment and profitability in future years, is much more difficult.

Special depreciation allowance

No provision

Restructure the existing special depreciation allowance, which permits businesses to immediately write off 30% of new investments in facilities and equipment purchased between September 10, 2001 and September 11, 2004, and only depreciate the remaining value over the usual period. The House Democrats' plan would permit a 50 percent bonus in 2003, declining to 10 percent in 2004.

Expand the current special depreciation allowance. A 60% depreciation allowance would be retroactive to September 10, 2001; an allowance of 70% would apply to prospective investments made in the remaining months until September 11, 2004.

Implications for the states: Both proposals would involve costs for states that conform for 2003. Senator Baucus' proposal would more than double the cost for states. The House Democrats' plan would ease the projected burden for 2004.

Conforming to the existing special depreciation allowance, enacted in the economic stimulus package in 2001, was a contentious issue as states weighed the negative impact on state revenues with the increased complexity for state taxpayers during state legislative sessions during 2002. The Center on Budget and Policy Priorities estimated the nationwide impact on states at $4.8 billion in the first year and more than $14 billion over three years. Since the allowance is in lieu of later depreciation, most of this cost would be returned to states later in the decade.

In the end, 29 states decided to decouple or simply did not act to conform. 16 states passed legislation to decouple and 13 states that do not automatically conform have not passed legislation to do so. 14 states automatically continue to conform while 3 states passed legislation to do so.

Small business expensing

Permanently increase the current limit on small business expensing under Section 179 in lieu of depreciation from $25,000 to $75,000 and would index the higher amount for inflation.

Provide an increase for 2003 in the limit on small business expensing from $25,000 to $50,000.

Provide an increase for 2003 from $25,000 to $75,000. The investment can only be claimed, under current law, by businesses that invest less than $200,000. This threshold would be raised to $325,000.

Implications for the states: Each proposal would involve costs for the states to conform.

Personal income tax rate reductions

Accelerate reductions in marginal income tax rates now scheduled for 2004 and 2006.

No provision

No provision

Implications for the states: No direct cost for the states. As with each of the other proposals geared toward economic stimulus, state revenues would be increased by any resulting growth in consumer spending and investment.

Marriage penalty relief

Accelerate a scheduled increase in the standard deduction for married individuals filing jointly.

No provision

No provision

Implications for the states: Changes in the standard deduction affect revenues in 11 states that begin calculating state income taxes from federal taxable income. (For a broader explanation of state conformity to the federal tax code, see The Impact of Federal Tax Changes on States.)

Income tax rebate

No provision

Provide a refundable income tax rebate of up to $300 per person.

Eliminate taxes on the first $3,000 of wages in 2003. Withholding tables would be adjusted; low-income wage earners would receive up to $300 as a 10% rebate on the first $3,000 of their wages.

Implications for the states: The effects on state revenues would vary widely depending on how legislation is crafted. An exclusion from income would have negative implications for state revenues. A credit against federal taxes would not.

Child tax credit

Accelerate the scheduled increase in the child tax credit from $600 to $1,000. For 2003, the additional $400 would be issued in the form of a check.

No provision

No provision

Implications for the states: No direct cost for the states. As with each of the other proposals geared toward economic stimulus, state revenues would be increased by any resulting growth in consumer spending.

Corporate governance

No provision

No provision

Includes provisions to curb the use of tax shelters, including denial of tax benefits for transactions that do not have a legitimate economic or business reason. Raises $13 billion for the federal government over ten years.

Implications for the states: Would also tend to increase revenues in states where affected businesses are located.

Spending Provisions

Proposal

White House

House Democrats

Senator Baucus

Assistance for unemployed workers

Establishes Personal Reemployment Accounts containing up to $3,000 per individual for job training, child care, transportation, moving costs or other expenses associated with finding a job. Any individual who finds a job within 13 weeks would be able to keep their leftover funds as a reemployment bonus.

Provides temporary aid to the states to broaden coverage to low-wage earners and part-time workers.

Provides temporary federal funding for regular unemployment insurance benefits to part-time workers and those who would be eligible under "alternative base periods".

Implications for the states: It is unclear what administrative funds, if any, would be provided to states for administering Personal Reemployment Accounts. Nor is it clear how temporary funding envisioned by Democrats would be administered or what requirements would be associated with the federal funds.

General revenue sharing

No provision

No provision

Instructs the Treasury Department to distribute $75 billion on a one-time basis to the states and territories. No restrictions are placed on how the new funding may be used.

Implications for the states: Senator Baucus' proposal did not include details on how revenue sharing would be allocated among the states.

Medicaid cost-sharing

No provision

Provides a one-year, $10 billion increase in the federal share of Medicaid payments. Each state would receive a 2% increase in its federal matching rate for Medicaid; high unemployment states would receive an increase of 2.5%. Would also hold states harmless that would otherwise have their match reduced from the previous year.

No provision

Implications for the states: States that restrict eligibility for Medicaid after January 1, 2003, would be ineligible for the increased match.

Homeland Security

No provision

Provides $10 billion in one-time federal grants to assist states with urgent unmet needs in homeland security. Would be delivered through existing formula grant programs. $3 billion is earmarked for transit facilities and $2 billion for airport security.

No provision

Implications for the states: It is not known what proportion of this funding would be received by states and what proportion would be sent directly to local governments.

Highway funding

No provision

Would provide an additional $5 billion in highway funding for 2003, with cost-sharing requirements deferred for up to two years.

Instructs the Treasury Department to sell $4 billion in tax credit bonds, to be deposited in the Highway Trust Fund and then apportioned to states.

Implications for the states: $4 billion in additional funding would be required to return highway spending to its levels for FY 2002.

Other assistance to states

No provision

Would provide $6 billion in one-time assistance for unspecified special support for critical needs. Would be targeted to helping those most hurt by unemployment and the stagnant economy.

No provision

Implications for the states: No details have emerged on which critical needs would be met through this funding.