The federal income tax cuts signed by President Donald Trump will paradoxically raise tax bills on many Americans at the state level. Now, states are grappling with how to handle the inadvertent tax hike—should they cut rates to prevent rising tax burdens, spend the potential revenue or conform their systems to the new federal rules?
In Louisiana, it appears to be a foregone conclusion that lawmakers will spend the estimated $200 million that will come from the tax bill. The money comes largely from a provision called federal deductibility, or the ability of taxpayers to deduct their federal taxes on their state tax returns.
Because Congress lowered federal rates, that deduction is now worth less. Thus, tax burdens rise for Louisiana taxpayers. It’s unclear whether the money will hit Louisiana’s books in time to help stave off a $1 billion “fiscal cliff,” but lawmakers have suggested using the money to plug the hole.
But in other states, The Wall Street Journal reports lawmakers are gearing up for legislative sessions in which they will make tough choices on how to handle the roundabout tax hike on state taxes.
“Everyone thought that tax reform was done,” says Nicole Kaeding, an economist at the conservative-leaning Tax Foundation. “All we’ve done is move it from one capital to 50 capitals.”
