STATE FISCAL OUTLOOK FOR 2002

May 13, 2002 Report on Tax Conformity and the States. Click here for a printer-friendly version of this document (Adobe Acrobat Reader Required)

Recent Federal Tax Legislation
and the States

June 2002 Update

Introduction

This report examines the impact of recent federal tax decisions on state revenues. Significant changes in the federal tax code enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Job Creation and Worker Assistance Act of 2002 (JCWAA) have had the effect of substantially reducing revenues to the states. Those provisions with the largest reported impact include the repeal of the state death tax credit, tax treatment of retirement and education savings plans, the new above-the-line deduction for higher education expenses, and the special depreciation allowance to spur business investment. This report provides background information on the impact of these federal tax changes on the states and a state-by-state look at their expected effects.

This report includes projections of the future effect of changes in federal and state tax law on state revenues. All estimates provided in this report are those being used by state legislatures in determining whether to conform or decouple from the recent changes in federal tax law. There are several reasons to be cautious, however, in interpreting these projections or comparing them with each other. First, state revenue forecasting procedures vary, as do the assumptions that are taken into account about the effect of changes in tax law on individual spending and investing behavior. Second, not every state typically conforms to the same provisions of federal law, which leads to a substantial variation in what different states' projections are intended to represent. Third, some states provided estimates of the full cost to conform to all changes in federal tax law, while others provided information on the costs associated with conforming in part. For this reason, those estimates that are associated with specific provisions of law are detailed separately in the charts in this report.

Information for this report was collected through surveys of members of the National Association of Legislative Fiscal Offices in November 2001 and March 2002. Additional information for this report was gathered separately from state legislative staff. Executive branch personnel in several states also provided valuable information. The author wishes to thank fiscal staff throughout the country for providing the information contained in this report, reviewing its accuracy and providing background information on existing state law and pending legislation. Trina Griffin, staff attorney for the North Carolina General Assembly, provided additional research on state laws and legislation relating to the state death tax credit. The author is also grateful to Nick Johnson and Elizabeth McNichol of the Center for Budget and Policy Priorities for sharing the results of their research on state efforts to decouple from the state death tax credit and the special depreciation allowance. The author is especially grateful to Harley Duncan, Ronald Alt and Verenda Smith of the Federation of Tax Administrators for sharing their research and ongoing assistance.

The first version of this report was issued on May 7, 2002. Updates were issued on June 11, 2002 and June 24, 2002. This third update contains information on state legislative activity through July 19, 2002.

Highlights of this Report

Since 1926, every state has collected a fixed share of revenue from the federal estate tax through a link to the "state death tax credit" (Section 2011 of the Internal Revenue Code). This credit is scheduled for a repeal in 2005 under the Economic Growth and Tax Relief Reconciliation Act of 2001. Thirty-five states plan to allow their estate tax to sunset with the federal credit, relinquishing revenue from the tax five years earlier than the federal government is doing so. Fifteen states will continue collecting their tax despite the repeal of the state death tax credit. (Twelve states impose a separate estate or inheritance tax that was not originally linked to the federal credit.) For the states that have reported an estimated cost for FY 2003, the projected cost is between $1 million (Idaho) and $367 million (California). California projects a cost of more than $1.5 billion by FY 2005.
Most state income taxes are also tied to provisions of the Internal Revenue Code. No legsilation is required for twenty-three states to mirror many of the tax benefits for retirement and education savings that were provided in EGTRRA. Twelve states have passed legislation to do so. Four states have not yet determined whether to conform, although conforming legislation is awaiting the governor's signature in Wisconsin. Two states' tax laws (New Jersey and Pennsylvania) differ from those of the federal government to such an extent that conforming legislation is not under consideration. Nine states have no personal income tax or impose a tax on interest income and dividends only. For those states that reported an estimated cost for FY 2003, the cost of the retirement savings provisions ranges from $1.1 million (Nebraska) to $44 million (California). Many states reported that the largest revenue loss results from the new above-the-line deduction for higher education expenses. The cost in FY 2003 for those states that reported the projected cost to conform to this deduction ranges from $3 million (Nebraska) to $73 million (California). A few states have decided to conform to other tax incentives for education but disallow this deduction.
Corporate income taxes in 46 states use the same schedule for depreciation as the federal government. However, a majority of these states have not conformed to the special depreciation allowance provided in the Job Creation and Worker Assistance Act. The legislatures in 16 states, the District of Columbia and New York City have passed legislation to explicitly prevent the special allowance from being claimed. An additional 13 states have not passed the conforming legislation that would be required in their state for taxpayers to claim the increased allowance against their state taxes. Lawmakers in a number of states have concluded that the short-term cost (the special allowance permits a deduction that would otherwise be claimed later, so much of the initial cost would be recouped later in the decade) is prohibitive given their existing budget constraints. Several states do not normally consider federal tax changes until the following calendar year and will not decide whether to conform until their next regular session in 2003. State taxpayers are permitted to claim the depreciation allowance against their state taxes in only 17 states (in 14 according to preexisting state law and in three as a result of conforming legislation). For the states that have reported their projected cost to NCSL, the cost for FY 2003 is between $12 million (Vermont) and $300 million (Illinois).

Explanation of State Conformity to the Federal Tax Code

State governments have a primary role in providing services such as public education, transportation, and water supply and in ensuring public health and safety. The federal government assists the states in providing these vital public services through grants in aid, which represent roughly 25 percent of total state spending. Consequently, when the federal government changes its spending policy, states must adjust their budgets to accommodate changes in the flow of federal spending.

The relationship between federal and state tax policy, however, is less frequently discussed and is generally not well understood. Although sales and property taxes are administered independently of the federal government, state income taxes and certain other sources of state revenue are based on rules and definitions in the federal Internal Revenue Code. States rely on federal reporting for auditing and enforcement. As a result, certain kinds of changes in federal tax policy can have substantial consequences for the states. The extent of these consequences generally depends on how closely state taxes are tied to the federal tax.

The practice of mirroring federal tax provisions at the state level - referred to as "conforming" - promotes compliance and simplifies tax administration. However, it also carries a risk that state revenues will rise and fall with changes in federal tax policy.

State practices in this area differ greatly. Some states' laws were written to provide many of the same benefits as the federal government. Other states' laws contain an explicit link to the definitions and deductions contained in the federal code. Many states use a federal "starting point" instructing state taxpayers to begin their calculation of state taxes owed by copying a specific line from their federal tax return. Some states conform to provisions in the federal code as it is currently in effect, while other states conform as of a date certain. These states usually update their conformity provisions on a regular basis.

As a result, the impact of federal tax changes on state revenues also differs greatly. Usually, the state has an option to conform or not. A state may choose to conform to some, but not all, of the federal tax changes adopted during the year. Depending on state law, this may be accomplished by passing legislation to conform, by passing legislation to decouple from the federal tax code, or through inaction. Depending on the nature of the federal tax change and the mechanism that states use to conform or decouple, a decision not to conform will present a greater or lesser burden for the taxpayer. For example, a decision to use a separate schedule for depreciation than the federal government may pose a substantial administrative burden on corporations within the state. A decision not to mirror a specific federal tax credit, however, poses a relatively low administrative burden for the taxpayer.

There are also exceptions to the rule. Five states - Alabama, Iowa, Louisiana, Montana and North Dakota - allow a deduction for federal taxes paid. Federal tax legislation usually has less of an effect on revenues in these states because changes in revenue from the deduction for federal taxes offsets the changes in revenue for the state to conform under its own tax laws.

Economic Growth and Tax Relief Reconciliation Act:
Repeal of the State Death Tax Credit

Since 1926, the federal government has permitted each state to collect a "pickup" on the federal tax, in effect permitting states to collect a share of a tax that would otherwise go to the federal government. The mechanism used to collect this pickup is the "credit for state death taxes" as described in Section 2011 of the Internal Revenue Code.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) increases the unified credit and gradually reduces the top rate for the estate tax until 2009, with full repeal occurring in 2010. The state death tax credit, however, is repealed in 2005. The accelerated repeal of the state death tax credit does not reduce the total amount of the estate tax; rather, it increases the percentage that is collected by the federal government rather than the state.

Table 1. Schedule for Repeal of the Estate Tax and the State Death Tax Credit
	2002	2003	2004	2005	2006	2007	2008	2009	2010
Unified Credit	$1m	$1m	$1.5m	$1.5m	$2m	$2m	$2m	$3.5m	Repeal
Top Rate	50%	49%	48%	47%	46%	45%	45%	45%	Repeal
State Credit	12%	8%	4%	Repeal

The state death tax credit is replaced with a deduction for state taxes paid after December 31, 2004. Instead of providing a credit against the tax owed to the federal government, however, the new deduction reduces the federal taxable value of the estate by the amount of any estate, inheritance, legacy or succession tax imposed by a state. Second, it requires most states to enact new legislation to continue collecting their existing tax.

In some states - such as Alabama, Florida and Nevada - lawmakers find it almost impossible to continue collecting an estate tax because the pickup mechanism is part of the state constitution. In a few other states - such as Virginia - it would require an affirmative decision of the legislature to repeal their existing tax.

The federal estate tax repeal was enacted at a time when most states had already reduced or repealed their own inheritance taxes and were continuing to collect only the federal pickup. In 1989, 25 states imposed their own estate or inheritance taxes in addition to the pick-up of the federal credit. By 2000, only 15 states were still collecting revenue separate from the pick-up tax and several of them were in the process of repealing or reducing their separate tax. However, because the sudden elimination of the state death tax credit would exacerbate revenue losses states are already facing as a result of the declining economy, lawmakers in several states began considering options to continue collecting revenue from the estate tax after the federal repeal.

Table 2. State Death Tax Credit: Status of State Legislation and the Cost to Conform
State	Under current law, will the state continue to collect an estate tax that has traditionally been linked to the federal credit?		What is the projected cost?	Comments/ Status of Legislation
State	YES	NO	What is the projected cost?	Comments/ Status of Legislation
Alabama		X	FY 2003: $12 million FY 2004: $25 million FY 2005: $37 million FY 2006: $50 million	The Alabama constitution prohibits an estate tax greater than the federal pickup.
Alaska		X	After 2004: $2 million	Automatically conforms.
Arizona		X	FY 2003: $18.83 million FY 2004: $38.14 million FY 2005: $57.69 million	H.B.2712 updates reference to provisions of federal law including the state death tax credit to March 9, 2002. Conference report passed the House and Senate May 23. Signed by the governor June 6.
Arkansas		X		Current law imposes a transfer tax equal to the federal credit as of January 1, 1999. However, state law specifies that no tax shall apply if there is no federal estate tax. The Department of Revenue is interpreting the discrepancy to compel conformity and the phase-out is being assumed in legislative revenue estimates.
California		X	FY 2001-2: $77 million FY 2002-3: $367 million FY 2003-4: $725 million FY 2004-5: $1.55 billion	Statutory initiative in 1982 repealed the inheritance and gift tax and imposed an estate tax equal only to the pick-up tax.
Colorado		X	FY 2002-3: $14.6 million FY 2003-4: $36.6 million FY 2004-5: $55 million	Automatically conforms.
Connecticut	(I)	X	FY 2003: $36 million FY 2004: $87 million FY 2005: $138 million FY 2006: $192 million FY 2007: $200 million	SB 611 would have freezed the state estate tax at the federal rate that applied on January 1, 2001. Language was not included in the final agreement on the budget (HB 6002).
Delaware		X	FY 2003: $7.61 million FY 2004: $16.27 million FY 2005: $25.48 million FY 2006: $34.67 million	Automatically conforms.
District of Columbia	See comments.			Interpretations of current law differ. The budget approved by the council on May 7 clarifies that the District of Columbia will continue to collect the tax. The U.S. Congress reviews the district's budget as part of the annual appropriations process.
Florida		X	FY 2002-3: $150 million FY 2003-4: $415.9 million FY 2004-5: $662.7 million FY 2005-6: $851.2 million FY 2006 7: $939.8 million	The Florida constitution prohibits an estate tax greater than the federal pickup.
Georgia		X	FY 2003: $33 million FY 2004: $37 million FY 2005: $40 million FY 2006: $45 million FY 2007: $9 million FY 2008: $9.5 million FY 2009: $10 million FY 2010: $10.5 million FY 2011: $11 million	H.B. 1026 updated reference to the federal code to January 1, 2002. Passed by the House February 18; passed by the Senate March 7. Signed into law April 18.
Hawaii		X		SB2824 updated reference to provisions of federal law including the state death tax credit to December 31, 2001. Conference report passed the House and Senate April 30. Signed by the governor on July 1. Act 223.
Idaho		X	FY 2003: $1 million	HB492 updated conformity to provisions of federal law including the state death tax credit to January 1, 2002. Passed the House Feb. 11; passed the Senate Feb. 21. Signed by the governor March 4. Session Law Chapter 59.
Illinois		X	FY 2003: $90 million FY 2004: $216 million FY 2005: $314 million FY 2006: $410 million FY 2007: $458 million	Automatically conforms.
Indiana	(I)	X	FY 2003: $7.4 million FY 2004: $17.6 million FY 2005: $21 million FY 2006: $21.5 million FY 2007: $21.4 million FY 2008: $21.2 million	HB 1195 updated conformity to January 1, 2002. Passed the House Jan. 22; passed the Senate Feb. 14; conference report passed House and Senate March 14; signed by the governor March 28. Public Law 177.
Iowa	(I)	X	FY 2003: $15 million FY 2004: $26 million FY 2005: $38 million FY 2006: $44 million FY 2007: $46 million FY 2008: $47 million FY 2009: $48 million FY 2010: $50 million FY 2011: $45 million	House File 2116 updated conformity to January 1, 2002. Passed the House January 31; passed the Senate March 21; passed the House March 25; signed by the governor April 4.
Kansas	X			Current law imposes a tax equal to the federal credit as of December 31, 1997.
Kentucky	(I)	X		HB 457 updated references to provisions of federal law including the state death tax credit to December 31, 2001. Signed by the governor April 24.
Louisiana	(I)	X		Automatically conforms.
Maine	X		FY 2003: $9.02 million FY 2004: $16.67 million FY 2005: $23.21 million FY 2006: $30.51 million FY 2007: $33.17 million FY 2008: $36.14 million FY 2009: $39.42 million FY 2010: $43.95 million	Public Law 559 (LD 2080) requires taxpayers to remit the full amount under prior law to the state for deaths occurring in 2002.
Maryland	X (I)		FY 2003: $27.2 million FY 2004: $59.3 million FY 2005: $83.6 million FY 2006: $97.3 million FY 2007: $100 million	SB 323 continues the Maryland estate tax in the same manner as if the federal credit had not been repealed or reduced. Passed the House April 1; passed the Senate April 2. Signed by the governor May 16.
Massachusetts		X		Automatically conforms.
Michigan		X	FY 2001-2: $12 million FY 2002-3: $67 million	Automatically conforms.
Minnesota	X		FY 2003: $16.5 million FY 2004: $31.5 million FY 2005: $45 million	Current law imposes a tax equal to the federal credit as of December 31, 2000.
Mississippi		X		Automatically conforms.
Missouri		X		Automatically conforms.
Montana		X		Automatically conforms.
Nebraska	X		FY 2003: $5.21 million FY 2004: $10.80 million FY 2005: $16.75 million	Decoupling legislation, L.B. 905, passed the legislature April 16 and was signed by the governor on April 18.
Nevada		X	FY 2002-3: $9.5 million FY 2003-4: $23.4 million FY 2004-5: $35 million FY 2005-6: $47 million FY 2006-7: $54 million FY 2007-8: $57.8 million FY 2008-9: $61.9 million FY 2009-10: $66.2 million FY 2010-11: $70.8 million	The Nevada constitution prohibits an estate tax other than the federal pickup.
New Hampshire	(I)	X	FY 2003: $5.2 million	Under current law, New Hampshire conforms to the Internal Revenue Code as of December 31, 2001.
New Jersey	X (I)		After 2004: $240 million.	Assembly No. 2302 fixes the terms of the estate tax for decedents dying after December 31, 2001, to those that applied to decedents dying on December 31, 2001. Introduced May 9; passed the House June 20; passed the Senate June 30; signed into law on July 1 as P. L. 2002, c. 31.
New Mexico		X	FY 2002: $2.5 million FY 2003: $8.33 million FY 2004: $14.33 million FY 2005: $20.59 million FY 2006: $24.94 million	Automatically conforms.
New York	X		.	Current law imposes a tax equal to the federal credit as of July 22, 1998.
North Carolina	X			Current law imposes a tax equal to the federal credit as of January 1, 2001.
North Dakota		X	All revenue goes to local subdivisions. The net effect has not been estimated.
Ohio	(E)	X		Automatically conforms.
Oklahoma	X (E)		No cost.	Current law imposes a separate estate tax that is equal to or greater than the federal credit. Elimination of the state death tax credit will not reduce state revenues.
Oregon	X		.	Under the Oregon Constitution, definitions in the Oregon Revised Statutes are frozen to a date certain in the Internal Revenue Code, except for provisions defining taxable income, which may change as they are amended from time to time in the IRC.
Pennsylvania	(I)	X		Automatically conforms.
Rhode Island	X		FY 2002: $5.63 million FY 2003: $11.25 million FY 2004: $16.88 million FY 2005: $22.5 million	Rhode Island imposes a tax equal to the federal credit as of January 1, 2001.
South Carolina		X	FY 2002-3: $15.5 million	H. 4695 updated references to provisions of federal law including the state death tax credit to December 31, 2001. Signed by the governor April 22.
South Dakota		X		Automatically conforms.
Tennessee	(I)	X		Automatically conforms.
Texas		X	FY 2003: $81 million FY 2004: $159 million FY 2005: $195 million FY 2006: $253 million	Automatically conforms.
Utah		X	FY 2003: $3 million FY 2004: $8 million FY 2005: $12 million FY 2006: $16 million	Automatically conforms.
Vermont	X		FY 2002: $.4 million FY 2003: $2.26 million FY 2004: $4.42 million FY 2005: $6.58 million FY 2006: $8.49 million	Under Act 140, signed into law June 21, Vermont imposes a tax equal to the federal credit as of January 1, 2001. Any part of an estate related to a farming business is exempt.
Virginia	X			Current law imposes a tax equal to the federal credit as of January 1, 1978.
Washington	X		FY 2003: $25 million FY 2004: $52 million FY 2005: $77 million FY 2006: $102 million FY 2007: $110 million	Current law imposes a tax equal to the federal credit as of January 1, 2001. Legislation to conform except for the state credit phase-out failed to pass. Legislation to fully conform was introduced but not considered.
West Virginia		X	FY 2002: $1 million FY 2003: $5 million FY 2004: $9 million FY 2005: $13 million FY 2006: $16 million	Conforming legislation, SB661, signed by the governor April 3. Prior law imposed a tax of no less than the federal credit as it existed on January 1, 1985.
Wisconsin	X		After 2007: $90 million.	2001 Act 16 applies the federal credit as of December 31, 2000 for deaths occurring between September 30, 2002 and January 1, 2008. After December 31, 2007, the tax is computed under federal law in effect on the date of death.
Wyoming		X	FY 2002: $1.9 million FY 2003: $3.75 million FY 2004: $5.625 million FY 2005: $7.5 million	Automatically conforms.

(I) = State imposes a separate inheritance tax. These taxes are scheduled for elimination in Connecticut (2005); Louisiana (2004) and New Hampshire (2003).

(E) = State imposes a separate estate tax.

Economic Growth and Tax Relief Reconciliation Act:
Personal Income Tax Provisions

The Economic Growth and Tax Relief Reconciliation Act contained a number of personal income tax provisions that also have the effect of reducing state income tax revenues. Most states feel this spillover effect as a result of changes in the federal tax code that alter calculations on the federal 1040 appearing above line 33 (adjusted gross income). Several states are also affected by changes that alter calculations above line 39 (taxable income). This is a result of the common practice of beginning the calculation of state personal income taxes from a specific line on the federal return, or "starting point".

Table 3. State Relationships to the Federal Tax Code
Starting Points and Automatic or Date-Certain Conformity

Starting Point

Automatic

Date Certain

Federal Taxable Income

Colorado

North Dakota

Oregon

Rhode Island

Utah

Vermont

Hawaii

Idaho

Minnesota

North Carolina

South Carolina

Federal Adjusted Gross Income

Connecticut

Delaware

District of Columbia

Illinois

Kansas

Louisiana

Maryland

Massachusetts

Michigan

Missouri

Montana

Nebraska

New Mexico

New York

Ohio

Oklahoma

Virginia

Arizona

California

Georgia

Indiana

Iowa

Kentucky

Maine

West Virginia

Wisconsin

No Federal Starting Point

Alabama

Arkansas

Mississippi

New Jersey

Pennsylvania

No Personal Income Tax

Alaska

Florida

Nevada

South Dakota

Texas

Washington

Wyoming

Taxes on interest income and dividends only:

New Hampshire

Tennessee

Several provisions of the law affect calculation of adjusted gross income, including changes in the rules for IRAs and qualified pension plans, modifications to education IRAs, expansion of qualified tuition plans, a new deduction for higher education expenses, and a phase-out of the limit on personal exemptions. Additional provisions affect calculation of federal taxable income, including a phase-out of the limit on itemized deductions and an increase in the standard deduction for married couples filing jointly. In addition, several states mirror specific provisions of federal law apart from their starting point, such as the child, dependent care and adoption tax credits.

The personal income tax provisions that have drawn the most attention in state legislatures are those relating to retirement savings and education. The law increases contribution limits and catch-up contributions to IRAs; expands coverage and increases pension portability; increases the annual limit on contributions to education IRAs and makes several changes to the rules for contributions and distributions; expands the definition of "qualified tuition program" to include certain private prepaid tuition programs and alters several other rules pertaining to distributions from a qualified tuition plan; and provides a new above-the-line deduction for qualified higher education expenses.

The following chart indicates the current status of state conformity with these provisions of the federal law and, where available, state estimates of the cost to conform. Unless otherwise noted, these are estimates of the full cost to conform. Figures are not necessarily consistent with the final cost of specific legislation.

Table 4. Personal Income Tax Provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001: Status of State Legislation and the Cost to Conform
State	Does the state conform to the changes in rules for IRAs and qualified retirement plans?			Does the state conform to the new education tax incentives?			Status of Legislation
State	YES	NO	What is the projected cost?	YES	NO	What is the projected cost?	Status of Legislation
Alabama	X			Alabama conforms except that state taxpayers do not begin calculation of state taxes from a federal starting point. Consequently, the state does not conform to the deductions for higher education expenses or student loan interest.			H.B. 616, which would have removed an exception from existing conformity (optional treatment of elective deferrals as Roth IRA contributions), was introduced but not considered.
Alaska	N/A			N/A			No income tax.
Arizona			FY 2002: $1.12 million FY 2003: $3.45 million FY 2004: $5.02 million FY 2005: $6.91 million	X		Higher education expenses deduction: FY 2002: $3.26 million FY 2003: $6.79 million FY 2004: $7.77 million FY 2005: $9.39 million All education provisions: FY 2002: $5.15 million FY 2003: $11.01 million FY 2004: $12.33 million FY 2005: $14.52 million	H.B. 2712 updated conformity to March 9, 2002. Conference report passed the House and the Senate May 23, 2002. Signed by the governor June 6, 2002.
Arkansas		X			X		There is no regular session scheduled in 2002. Staff is drafting retroactive conformity legislation to be considered during the legislative session in 2003.
California	X		FY 2002-3: $44 million FY 2003-4: $47 million FY 2004-5: $58 million	X		FY 2002-03: minor FY 2003-04: $1 million FY 2004-05: $1 million (estimates of SB657 and AB1122)	SB 657 and AB1122 contain identical provisions and conform to retirement and education savings provisions. Legislation does not conform to deduction for higher education expenses or the repeal of the limit on the deduction for student loan interest. Each was enrolled by the legislature on April 25 and signed by the governor on May 9, 2002.
Colorado	X		FY 2001-2: $7.2 million Annual cost by FY 2009-2010: $26 million	X		FY 2001-2: $2.6 million Annual cost after phase-in: $8 million	Automatically conforms.
Connecticut	X		FY 2002: $900,000 FY 2003: $5.7 million FY 2004: $8.3 million FY 2005: $11.1 million FY 2006: $13.8 million FY 2007: $15.4 million	X		Higher education expenses deduction: FY 2003 $3.1 million FY 2004 $4.4 million FY 2005 $6.4 million FY 2006 $9 million FY 2007 $10.7 million Student loan interest: FY 2003 $800,000 FY 2004 $1 million FY 2005 $1 million FY 2006 $1.1 million FY 2007 1.2 million Qualifying tuition plans: FY 2003 $200,000 FY 2004 $300,000 FY 2005 $500,000 FY 2006 $500,000 FY 2007 $600,000	Automatically conforms.
Delaware	X		FY 2002: $508,000 FY 2003: $1.18 million FY 2004: $1.51 million FY 2005: $2.02 million FY 2006: $2.40 million	X		FY 2002: $1.15 million FY 2003: $1.6 3 million FY 2004: $2.10 million FY 2005: $2.33 million FY 2006: $1.15 million	Automatically conforms.
District of Columbia	X			X			Automatically conforms.
Florida	N/A			N/A			No state income tax.
Georgia	X		FY 2003: $5.8 million FY 2004: $8.5 million FY 2005: $5.5 million FY 2006: $9.1 million FY 2007: $9.7 million FY 2008: $4.7 million FY 2009: $6.8 million FY 2010: $7.6 million FY 2011: $6.7 milllion	X		All education provisions: FY 2003: $25 million FY 2004: $10.2 million FY 2005: $8.4 million FY 2006: $4 million FY 2007: $20.7 million FY 2008: $5.7 million FY 2009: $2.2 million FY 2010: $2.1 million FY 2011: $2.4 million Higher education deduction: FY 2003: $15.8 million FY 2004: $5.6 million FY 2005: $6.7 million FY 2006: $2.4 million FY 2007: $22.8 million FY 2008: $7.8 million	HB 1026 updated conformity to January 1, 2002. Signed by the governor April 18.
Hawaii	X			X			SB 2824 updated conformity to December 31, 2001 except for the deduction for higher education expenses. Conference report passed the House and Senate April 30. Signed into law June 28 as Act 223.
Idaho	X			X			HB492 updated conformity to January 1, 2002. Passed the House Feb. 11; passed the Senate Feb. 21. Signed by the governor March 4. Session Law Chapter 59.
Illinois	X			X			Automatically conforms.
Indiana	X		FY 2002: $2.14 million FY 2003: $5.37 million FY 2004: $7.51 million FY 2005: $9.97 million	X		Education IRAs: FY 2002: $500,000 FY 2003: $1.07 million FY 2004: $1.44 million FY 2005: $1.77 million Qualified tuition plans: FY 2002: $60,000 FY 2003: $150,000 FY 2004: $240,000 FY 2005: $340,000 Higher education expenses deduction: FY 2002: $3.8 million FY 2003: $6.37 million FY 2004: $8.34 million FY 2005: $9.42 million Student loan deduction: FY 2002: $420,000 FY 2003: $750,000 FY 2004: $850,000 FY 2005: $900,000	HB 1195 updated conformity to January 1, 2002. Passed the House Jan. 22; passed the Senate Feb. 14; conference report passed House and Senate March 14; signed by the governor March 28. Public Law 177.
Iowa	X		Estimated cost, net including state deduction for federal income taxes paid: FY 2002: $660,000 FY 2003: $2.57 million FY 2004: $2.39 million FY 2005: $3.94 million FY 2006: $5.53 million FY 2007: $6.95 million FY 2008: $8.66 million FY 2009: $10.42 million FY 2010: $11.51 million FY 2011: $10.13 million	X		Estimated increase in revenue, net including state deduction for federal income taxes paid: FY 2003: $2.19 million FY 2004: $3.09 million FY 2005: $3.91 million FY 2006: $4.20 million FY 2007: $2.46 million FY 2008: $2.02 million FY 2009: $2.24 million FY 2010: $2.46 million FY 2011: $2.69 million	House File 2116 updated conformity to January 1, 2002. Passed the House January 31; passed the Senate March 21; passed the House March 25; signed by the governor April 4.
Kansas	X			X			Automatically conforms.
Kentucky	X			X			HB 457 updates conformity to December 31, 2001. Passed the House with amendment February 15; passed the Senate with amendment March 29; passed the House and presented to the governor April 15. Signed April 22.
Louisiana	X			X			Automatically conforms.
Maine	X		FY 2002: $1.02 million FY 2003: $2.35 million FY 2004: $3.03 million FY 2005: $4.01 million FY 2006: $4.75 million FY 2007: $5.28 million FY 2008: $6.04 million FY 2009: $6.97 million FY 2010: $7.78 million	X		Education savings accounts: FY 2002: $.24 million FY 2003: $.43 million FY 2004: $.55 million FY 2005: $.66 million FY 2006: $.79 million FY 2007: $.92 million FY 2008: $1.06 million FY 2009: $1.20 million FY 2010: $1.34 million Other education provisions: FY 2002: $1.09 million FY 2003: $3.69 million FY 2004: $4.01 million FY 2005: $4.34 million FY 2006: $1.86 million FY 2007: $1.12 million FY 2008: $1.25 million FY 2009: $1.34 million FY 2010: $1.47 million	LD 2080 updated conformity for FY 2002 and FY 2003. Passed the House and Senate and signed by the governor March 25. Public Law 559.
Maryland	X		FY 2003: $2.9 million FY 2004: $4.8 million FY 2005: $6.1 million FY 2006: $8.6 million FY 2007: $8.9 million	X		FY 2003: $18 million FY 2004: $16.1 million FY 2005: $23 million FY 2006: $24 million FY 2007: $7.5 million	SB 323 decouples from the higher education deduction. Passed the House April 1; passed the Senate April 2. Signed by the governor May 16.
Massachusetts	PARTIAL Massachusetts does not conform to provisions related to 401(k), 403(b), 457 and SIMPLE plans.		FY 2003: $13.5 million FY 2009: $27.5 million	PARTIAL Massachusetts does not conform to college education savings provisions.			S. 2339 would conform to retirement and college education savings provisions. Introduced April 11 and referred to the Joint Committee on Taxation. Passed the Senate April 25. Ordered to a third reading in the House June 19. Automatic conformity applies to only a few provisions, including Roth and education IRAs and government 457 plans.
Michigan	X		FY 2001-2: $4.1 million FY 2002-3: $9.4 million	X		FY 2001-2: $11.8 million FY 2002-3: $16.6 million	Automatically conforms.
Minnesota	X		FY 2002: $2.7 million FY 2003: $12 million FY 2004: $14.8 million FY 2005: $20 million	X		FY 2002: $7.1 million FY 2003: $22.3 million FY 2004: $23.8 million FY 2005: $26.9 million	H. 1 updated conformity to June 15, 2001. Enacted in June 2001. HF 351 updated cross-references in the state higher education finance chapter to the new amounts in federal law. Enacted in February 2002.
Mississippi	X			PARTIAL Earnings on amounts contributed to an Educational IRA are taxable to the owner in the year they are earned. Distributions should be from after tax dollars and not taxable. Mississippi recognizes the Mississippi Prepaid Affordable College Tuition Program Trust Fund (MPACT) and the Mississippi Affordable College Savings Fund (MACS). Distributions from either of these programs are exempt for state income tax purposes to the same extent as federal. Mississippi does not conform to the deductions for higher education expenses or student loan interest.
Missouri	X			X			Automatically conforms.
Montana	X			X			Automatically conforms.
Nebraska	X		IRA contribution limits: FY 2002: $422,000 FY 2003: $1.11 million FY 2004: $1.57 million FY 2005: $2.41 million	X		Higher education expenses deduction: FY 2002: $1.76 million FY 2003: $2.95 million FY 2004: $3.95 million FY 2005: $4.48 million Employer-provided assistance: FY 2002: $595,000 FY 2003: $1.02 million FY 2004: $1.17 million FY 2005: $1.25 million	Automatically conforms.
Nevada	N/A			N/A			No state income tax.
New Hampshire	N/A			N/A			Provisions do not apply to state tax on interest income and dividends.
New Jersey	IN PART New Jersey conforms automatically to all changes concerning employer contributions to pension plans and deferred compensation vehicles; the state has never conformed to federal provisions for employee contributions to pension plans and employee elective deferrals (with the exception of 401(k)s, where conformity is automatic); and has no IRA deductions. All rollovers among pension plans, deferred compensation vehicles and IRAs that are nonrecognition transactions for federal purposes are nonrecognition transactions for New Jersey purposes.			IN PART New Jersey conforms to federal contribution limits and qualified expenses definitions. The state enacted an exclusion for withdrawals for qualified expenditures prior to the federal act. There is no deduction for qualified higher education expenses and no deduction for student loan interest. New Jersey does not begin calculation of state taxes from a federal starting point and consequently does not conform to the deductions for higher education expenses or student loan interest.
New Mexico	X		FY 2002: $1.78 million FY 2003: $4.17 million FY 2004: $4.95 million FY 2005: $5.74 million FY 2006: $6.36 million	X		FY 2002: $1.06 million FY 2003: $1.69 million FY 2004: $2.12 million FY 2005: $2.38 million FY 2006: $1.56 million	Automatically conforms.
New York	X			X			Automatically conforms.
North Carolina		X			X		S.B. 1115 contains conforming language. Passed the Senate June 19.
North Dakota	X			X			Automatically conforms.
Ohio	X			X			Automatically conforms.
Oklahoma	X			X			Automatically conforms.
Oregon	X			X			Automatically conforms.
Pennsylvania	Pennsylvania does not exempt retirement plan contributions from state taxes. Interest and distributions are not taxed.			Pennsylvania does not exempt any education savings plan contributions from state taxes. Interest and distributions from the Tuition Account Program are not taxed. Pennsylvania does not begin calculation of state taxes from a federal starting point and consequently does not conform to the deductions for higher education expenses or student loan interest.
Rhode Island	X		FY 2002: $550,000 FY 2003: $1.2 million	X		FY 2002: $1.6 million FY 2003: $3.6 million	Automatically conforms.
South Carolina .	X			X			H. 4695 updated conformity to December 31, 2001. Passed the House Feb. 15; passed the Senate April 4. Ratified April 16. Signed by the governor April 22.
South Dakota	N/A			N/A			No state income tax.
Tennessee	N/A			N/A			Provisions do not apply to state tax on interest income and dividends.
Texas	N/A			N/A			No state income tax.
Utah	X			X			Automatically conforms.
Vermont	X		FY 2002: $.51 million FY 2003: $3.27 million FY 2004: $1.77 million FY 2005: $2.02 million FY 2006: $2.24 million	X		FY 2002: $.66 million FY 2003: $1.38 million FY 2004: $1.64 million FY 2005: $1.84 million FY 2006: $1.29 million	Automatically conforms under Act 140, signed into law June 21.
Virginia	X			X			Budget for the 2002-2004 biennium (H.B. 30) replaces automatic conformity with date-specific conformity as of Jan. 1, 2002 but does not affect existing conformity to retirement or education savings provisions of EGTRRA.
Washington	N/A			N/A			No state income tax.
West Virginia	X		Not calculated separately. Aggregate cost of all personal income tax provisions: FY 2002: $1 million FY 2003: $1 million FY 2004: $2 million FY 2005: $2 million FY 2006: $2 million	X		Not calculated separately. Aggregate cost of all personal income tax provisions: FY 2002: $1 million FY 2003: $1 million FY 2004: $2 million FY 2005: $2 million FY 2006: $2 million	SB 140 updated conformity from January 1, 2000 to January 1, 2002. Enacted March 2002.
Wisconsin	PENDING SIGNATURE	X	FY 2001-02: $3.85 million FY 2002-03: $10.55 million	PENDING SIGNATURE	X	FY 2001-02: $4.65 million FY 2002-03: $11.95 million	Conforming legislation, AB 1, passed by the Senate July 3. Passed by the Assembly July 5. Awaiting governor's signature.
Wyoming	N/A			N/A			No state income tax.

Economic Growth and Tax Relief Reconciliation Act:
Total Cost to Conform

Several provisions of the Economic Growth and Tax Relief Reconciliation Act, in addition to the repeal of the state death tax credit and the tax incentives for education and retirement savings, result in reduced revenue for the states. For example:

The repeal of the limit on itemized deductions is expected to cost Colorado $4.6 million in FY 2005-6, when it is first implemented, and $30 million by FY 2008-9.
Minnesota expects the standard deduction increase for married filers to cost $4.9 million in FY 2005.
Delaware provides a dependent care credit that is linked to the federal credit; in FY 2003, it is anticipated to cost the state approximately $500,000.
Minnesota provides a Working Family Credit that is based in part on the federal earned income tax credit; the annual reduction in state revenues due to changes in the federal EITC is estimated at $3 million.
Nebraska anticipates that changes in the alternative minimum tax will have an annual state cost of more than $2 million by FY 2005.

During state deliberations on whether to conform with the federal law in full or in part, many states provided estimates to NCSL of the total cost. These are estimates of the full cost to conform and are not necessarily consistent with the cost of specific legislation.

Table 5. Total Cost for States to Conform to Provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001
Alabama		Montana
Alaska	Annual cost after 2004: $2 million	Nebraska	FY 2002: $3.88 million FY 2003: $13.59 million FY 2004: $22.84 million FY 2005: $29.47 million
Arizona	FY 2002: $6.23 million FY 2003: $33.16 million FY 2004: $55.39 million FY 2005: $79.01 million (includes all federal tax legislation enacted in 2001)	Nevada	FY 2002-3: $9.5 million FY 2003-4: $23.4 million FY 2004-5: $35 million FY 2005-6: $47 million FY 2006-7: $54 million FY 2007-8: $57.8 million FY 2008-9: $61.9 million FY 2009-10: $66.2 million FY 2010-11: $70.8 million
Arkansas		New Hampshire	FY 2003: $5.2 million
California	FY 2001-2: $77 million FY 2002-3: $556 million FY 2003-4: $1.008 billion FY 2004-5: $1.886 billion	New Jersey
Colorado	FY 2001-2: $9.3 million FY 2002-3: $37 million FY 2003-4: $66.9 million 2010: $160 million	New Mexico	FY 2002: $4.91 million FY 2003: $13.7 million FY 2004: $20.91 million FY 2005: $28.89 million FY 2006: $35.66 million
Connecticut	FY 2002: $900,000 FY 2003: $50 million FY 2004: $106.1 million FY 2005: $161.4 million FY 2006: $212.9 million FY 2007: $218.1 million	New York
Delaware	FY 2002: $1.67 million FY 2003: $10.93 million FY 2004: $20.53 million FY 2005: $30.46 million FY 2006: $38.81 million	North Carolina
District of Columbia		North Dakota
Florida	2002-3: $150 million FY 2003-4 : $415.9 million FY 2004-5: $662.7 million FY 2005-6: $851.2 million FY 2006 7: $939.8 million	Ohio
Georgia		Oklahoma
Hawaii		Oregon
Idaho	FY 2003: $4.1 million	Pennsylvania
Illinois		Rhode Island	FY 2002: $3.6 million FY 2003: $8 million
Indiana	FY 2002: $8.21 million FY 2003: $23.37 million FY 2004: $37.57 million FY 2005: $46.2 million	South Carolina
Iowa	Net revenue increase due to deduction for federal taxes: FY 2001 - 2010: $163.78 million	South Dakota
Kansas		Tennessee
Kentucky		Texas	FY 2003: $81 million FY 2004: $159 million FY 2005: $195 million FY 2006: $253 million
Louisiana		Utah
Maine	FY 2002: $2.35 million FY 2003: $15.62 million FY 2004: $24.74 million FY 2005: $34.18 million FY 2006: $45.51 million FY 2007: $54.21 million FY 2008: $61.92 million FY 2009: $72.93 million FY 2010: $85.45 million	Vermont	FY 2002: $2.0 million FY 2003: $20.02 million FY 2004: $37.19 million FY 2005: $41.30 million FY 2006: $49.89 million
Maryland	FY 2003: $57.1 million FY 2004: $89.4 million FY 2005: $122 million FY 2006: $141.5 million FY 2007: $128.2 million	Virginia
Massachusetts		Washington	No significant cost.
Michigan	FY 2001-2: $27.4 million FY 2002-3: $92.8 million	West Virginia	FY 2002: $2 million FY 2003: $6 million FY 2004: $11 million FY 2005: $15 million FY 2006: $18 million Net revenue effects including an estimated increase in sales tax receipts due to the marginal rate reduction: FY 2002: $7 million revenue gain FY 2003: $0 million FY 2004: $4 million FY 2005: $7 million FY 2006: $9 million
Minnesota	FY 2002: $16 million FY 2003: $57 million FY 2004: $76.3 million FY 2005: $103 million	Wisconsin	FY 2002: $8.55 million FY 2003: $51.885 million
Mississippi		Wyoming	FY 2002: $1.9 million FY 2003: $3.75 million FY 2004: $5.625 million FY 2005: $7.5 million
Missouri

Job Creation and Worker Assistance Act:
Special Depreciation Allowance

The Job Creation and Worker Assistance Act of 2002, signed into law in March, includes a 30 percent depreciation allowance for qualified property placed into service between September 11, 2001, and September 10, 2004. The Joint Committee on Taxation has estimated the cost to the federal government for fiscal 2002 through 2004 at $97 billion. Because almost every state uses the same depreciation schedule as the federal government, this change also carries a cost to the states. The Congressional Research Service has estimated the nationwide impact on states at $5.4 billion in the fiscal year ending in 2002, $5.1 billion in fiscal 2003, and $4.2 billion in fiscal 2004.

To maintain simplicity and promote compliance, states that have a corporate income tax or other business tax that allows for depreciation of property generally use the same rules for depreciation as the federal government. A majority of states follow these rules - and any amendments to them - unless the legislature passes a law to do otherwise. The other states pass legislation whenever there are changes in the Internal Revenue Code to maintain their link to the federal rules. This year, however, many states are taking a sharp look at the relationship between state revenues and the federal code.

Although 46 states have a corporate income tax or other business tax that is linked to the federal rules for depreciation, the legislatures in 13 states have not passed conforming legislation that would be required for taxpayers to claim the increased allowance against their state taxes. The legislatures in 16 states, the District of Columbia and New York City have passed legislation to prevent the special allowance from being claimed. State taxpayers are permitted to claim the depreciation allowance against their state taxes in only 17 states (in 14 according to preexisting state law and in three as a result of conforming legislation).

States are taking two approaches to retaining the revenue, either through an add-back mechanism or by decoupling in a stricter sense of the term. Nebraska, for example, is requiring taxpayers to add back eighty five percent of the depreciation allowance in calculating their income for tax purposes. Twenty percent of that amount can be claimed each year from 2005 through 2009. (Taxpayers are still directed to claim normal depreciation under the federal rules; since the normal depreciation will be calculated on the adjusted federal basis, the eighty-five percent addback compensates for the reduced ability to claim normal depreciation. Similarly, the subtraction in 2005 through 2009 ensures that the addback is revenue neutral for the state.) Maryland, on the other hand, decouples entirely from 168(k), the new provision of the Internal Revenue Code that permits the depreciation allowance. Taxpayers in the state are directed to calculate their state income taxes as though the depreciation allowance had never taken effect.

The following chart indicates the status of state conformity to the special depreciation allowance. Legislatures in many of the states that must decide whether to conform will not meet again until 2003. In those states that are still in session, a frequent practice is to consider only federal legislation that was adopted during the previous calendar year. Consequently, lawmakers in many states may not decide whether to conform until their next session in 2003.

The special depreciation allowance does not increase the total deduction that a taxpayer may claim for purchase of a qualifying asset, but accelerates the schedule for depreciation. Consequently, much of the initial cost will be returned to the states beginning in 2005. The chart below indicates the projected cost to conform where this information was provided to NCSL. These are estimates of the full cost to conform and are not necessarily consistent with specific legislation. Other provisions of the bill - including an extension of the carryback period for net operating losses - involve costs for the states, although these costs are lower in the short term than the cost of the special depreciation allowance. NCSL did not collect information about legislation to conform or decouple from other provisions of the Job Creation and Worker Assistance Act of 2002.

Table 6. Special Depreciation Allowance: Status of State Legislation and the Cost to Conform
State	Does the state provide the depreciation allowance under current law?		What is the projected cost?	Comments/ Status of Legislation
State	YES	NO	What is the projected cost?	Comments/ Status of Legislation
Alabama	X			Alabama automatically conforms to changes in the depreciation schedule.
Alaska	See comments.			Alaska automatically conforms to changes in the depreciation schedule except that the 1981 version of the federal code applies for oil and gas taxpayers.
Arizona		X	FY 2002: $46.23 million FY 2003: $76.61 million FY 2004: $53.07 million FY 2005: $20.93 million	H.B. 2712 conforms to changes in the federal tax code through March 9. Arizona retains revenue from the depreciation change through an addback mechanism. Passed the House and Senate May 23. Signed by the governor June 4.
Arkansas		X		No regular session scheduled in 2002.
California		X		California uses its own depreciation schedule.
Colorado	X		C-corporations: $32 million Individuals: $26 million Total: $58 million
Connecticut		X	FY 2003: $20 million FY 2004: $25 million FY 2005: $30 million	Decoupling legislation, H. 6002, signed by the governor July 1.
Delaware	X
District of Columbia		X		Act A14-341 decouples from the section of the federal code that provides the special depreciation allowance. Enacted April 24.
Florida	X		FY 2002: $116 million FY 2003: $146 million FY 2004: $124 million FY 2005: $42 million	SB18E explicitly conforms. Passed the Senate May 3 and the House May 13. Signed by the governor June 7.
Georgia		X		HB 1026 updated conformity to January 1, 2002. Under standard procedure, the Georgia legislature would consider whether to conform during its legislative session in 2003.
Hawaii		X		SB2824 updates conformity through December 31, 2001. Signed into law June 28 as Act 223. Under standard procedure, the Hawaii legislature would consider whether to conform during its legislative session in 2003.
Idaho		X		HB492 updated conformity to January 1, 2002. Signed by the governor March 4. Under standard procedure, the Idaho legislature would consider whether to conform during its legislative session in 2003.
Illinois		X	FY 2003: $360 million	Legislation providing for an addback, S.B. 1543, passed both houses June 2 and was sent to the governor June 5. Signed June 28.
Indiana		X	Approximately $85 million per year	HB 1195 updated conformity to January 1, 2002. Signed by the governor March 28. Under usual procedure, the Indiana legislature would consider whether to conform during its legislative session in 2003.
Iowa		X	FY 2002: $14.4 million FY 2003: $46.1 million FY 2004: $47.9 million FY 2005: $34.6 million	House File 2116 updated conformity to January 1, 2002. Signed by the governor April 4. Under usual procedure, the Iowa legislature would consider whether to conform during its legislative session in 2003.
Kansas	X
Kentucky		X		H.B. 812, enacted April 11, clarifies that the state has not adopted changes to the federal internal revenue code that were enacted after December 31, 2001.
Louisiana	X
Maine	X		FY 2002: $.82 million FY 2003: $29 million FY 2004: $16.6 million FY 2005: $6.9 million	State budget includes conforming language. Full conformity is contingent on a projected state general fund surplus. If the surplus fails to materialize, the depreciation allowance for 2002 will be reduced and the extra amount can be claimed over the following three years.
Maryland		X	FY 2003: $80 million FY 2004: $74 million	SB 323 decouples from the section of the federal code that provides the special depreciation allowance. Passed the House April 1; passed the Senate April 2. Signed by the governor May 16.
Massachusetts		X	First year: $30 million	Decoupling legislation, HB 5006, passed the House and Senate April 11. Signed into law as Chapter 96.
Michigan	X
Minnesota		X	FY 2002: $103.8 million FY 2003: $129.7 million FY 2004: $117.4 million FY 2005: $28.2 million	HF 2498 establishes an addback mechanism to retain the revenue from the depreciation allowance. Conference report adopted by the House May 15 and by the Senate May 16. Governor returned without his signature May 18; filed by the Secretary of State May 18. Chapter 377, Laws 2002.
Mississippi		X		Mississippi allows a "reasonable allowance" for exhaustion, wear, tear and obsolescence of property. The Mississippi State Tax Commissioner has determined that the bonus depreciation allowance is not a reasonable allowance.
Missouri		X	FY 2003: $27 million	S.B. 1248, signed June 19, decoupled for one year. The difference in revenues is dedicated to elementary and secondary education.
Montana	X			No regular session scheduled in 2002.
Nebraska		X	FY 2003: $35.3 million FY 2004: $32.1 million FY 2005: $25.3 million FY 2006: $-1.2 million FY 2007: $-18.1 million	Legislature overrode the governor's veto on April 11 of legislation, L.B. 1085, that retains the revenue through an addback.
Nevada	See comments.			No corporate income tax. Depreciation is calculated for a tax on mineral proceeds according to rules issued by the Nevada tax commission.
New Hampshire		X		Under current law, New Hampshire conforms to the Internal Revenue Code as of December 31, 2001.
New Jersey	X		FY 2003: More than $100 million	A2501 decouples from the federal depreciation allowance and gives the Director of the Division of Taxation authority to formulate rules and regulations to carry out the decoupling from federal law, including the necessary basis adjustments. Passed the Assembly June 30. Passed the Senate July 2. P.L. 2002, c. 40.
New Mexico	X		Approximately $95 million
New York	X			State legislation permits New York City to decouple from the federal tax definitions. The mayor signed decoupling legislation (Introductory No. 220-A) on July 10. The cost was projected at $108 million in FY 2003 and more than $300 million over three years. Businesses in lower Manhattan are still eligible for the special depreciation allowance.
North Carolina		X	FY 2003: $90.3 million FY 2004: $213.2 million FY 2005: $152.2 million FY 2006: $83.1 million FY 2007: $0 FY 2008: $-89.2 million	The North Carolina Department of Revenue has instructed taxpayers to assume that the legislature will conform. S.B. 1292, approved by the Senate June 13, would require an add-back.
North Dakota	X			No regular session scheduled in 2002.
Ohio		X	FY 2003: $150 million FY 2004: $125 million FY 2005: $99 million	Addback legislation, S.B. 261, passed the Senate May 21 and the House May 29. Signed by the governor June 6.
Oklahoma	X
Oregon	X		FY 2002: $65.2 million FY 2003: $82.3 million	No regular session scheduled in 2002. Governor has proposed acting to retain the revenue in special session.
Pennsylvania		X	FY 2002: $245 million FY 2002-4: $690 million	Personal income tax law permits a deduction in accordance with "generally accepted accounting principles" and is not interpreted to permit the special depreciation allowance. Corporate income tax followed the federal rules until H.B. 1848, which requires an addback, took effect July 1. Conference report passed the House and Senate June 28 and was signed Juune 29. Act No. 89.
Rhode Island		X	FY 2002: $13.7 million FY 2003: $18.1 million FY 2004: $13.5 million	Decoupling language included in the FY 2003 budget, H7732A. Governor vetoed June 6. Legislature overrode June 12.
South Carolina		X		H.B. 4695, enacted April 22, updated reference to the federal code to December 31, 2001. Under usual procedure, the South Carolina legislature would consider whether to conform during its legislative session in 2003.
South Dakota		X		No corporate income tax, although a franchise tax on financial institutions is tied to the federal definition of taxable income. HB1036, signed February 13, updated code reference to January 1, 2002. Under usual procedure, the South Dakota legislature would consider whether to conform during its legislative session in 2003.
Tennessee		X		Legislation requiring an addback was passed by the legislature on July 3 and signed by the governor on July 4.
Texas		X		No regular session scheduled in 2002.
Utah	X		FY 2002: $11.36 million to $22.71 million FY 2003: $14.19 million to $28.38 million FY 2004: $12.85 million to $25.70 million FY 2005: $3.08 million to $6.17 million
Vermont		X	FY 2002: $2.658 million FY 2003: $11.75 million FY 2004: $6.763 million FY 2005: $1.414 million	Act 140, signed into law June 21, prohibits the accelerated depreciation for C-corporations but allows it for personal income taxpayers.
Virginia		X	More than $300 million	Budget for the 2002-2004 biennium (H.B. 29) replaces automatic conformity with date-specific conformity as of January 1, 2002. Signed by the governor April 9. Provision will expire with the budget on June 30, 2004 and will be reconsidered during the legislative session in 2003.
Washington	See comments.			No corporate income tax or business tax that provides for depreciation.
West Virginia	X		FY 2002: $16 million FY 2003: $35 million FY 2004: $20 million	Conforming legislation, SB 1008 and SB 1009, took effect on March 15, 2002.
Wisconsin	X	PENDING SIGNATURE	FY 2002: $26 million FY 2003: $130 million	Decoupling legislation, AB 1, passed by the Senate July 3. Passed by the Assembly July 5. Awaiting governor's signature.
Wyoming	See comments.			No corporate income tax. Separate state business taxes permit depreciation in accordance with generally accepted accounting principles and are not tied to the federal revenue code.

Recent Federal Tax Legislation and the States

June 2002 Update

Recent Federal Tax Legislation
and the States