A recent change in federal tax law regarding business investment in machinery and equipment could be very costly for many states — at a time when they can least afford it.  Nineteen states are on track to lose $5.3 billion in state corporate and individual income tax revenues during the current and next two state fiscal years:  some will lose revenue unless their legislatures act to prevent it, while others will lose revenue if they follow their previous practice of altering their tax codes to conform to such federal changes.  Another 26 states and the District of Columbia could lose $10.1 billion in state revenue if they break from their previous practice and conform to the federal change.

These losses would come on top of states’ record revenue losses resulting from the economic downturn, which are creating budget shortfalls of unprecedented size.  Fortunately, states can protect themselves from these revenue losses by “decoupling” the relevant part of their tax codes from the federal change.

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