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The fiscal cliff could increase state revenues

President Barack Obama holds a news conference in the East Room of the White House November 14, 2012 in Washington, DC.

Much of the recent public disucssion around the so-called fiscal cliff has generally revolved around one scenario: What happens if we go over the edge? Automatic, across-the-board budget cuts would kick in if politicians can’t strike a deal by the end of the year. That would have dire consequences for government agencies and the economy as a whole.

But could it mean more money for some states?

As part of the negotiations to avoid the fiscal cliff, lawmakers are combing through the budget and reconsidering tax deductions. For example, the feds may stop teachers from deducting school expenses, and they may scrap deductions for tuition and fees too.

“If the federal government decides not to offer those two deductions for the current tax year, then that would increase the state tax by a little bit,” says Verenda Smith, deputy director of the Federation of Tax Administrators.

Maybe more than a little bit. States generally use the Adjusted Gross Income figure from the federal tax forms. If that increases, the states can tax a larger pool of money.

"What could be for one person a forty or fifty dollar deduction, when spread over hundreds of thousands of people, can add up to millions of dollars in tax implications,” says Jason Fichtner, a senior research fellow at the Mercatus Center.

An extra million here or there isn’t always a blessing. But Fichtner says state budget planners would prefer to have the tax code finalized.

“The states are having some tough financial times right now. They’re trying to plan their own revenue. And by having an unstable and temporary tax code, they can’t plan very well for the future,” says Fichtner.

But some states can ignore the whole debate. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no state income tax. Fichtner adds that Tennessee and New Hampshire only tax dividends and interest income, but not ordinary income.

About the author

Jeff Tyler is a reporter for Marketplace’s Los Angeles bureau, where he reports on issues related to immigration and Latin America.

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