NCPA - National Center for Policy Analysis

States Mull Whether To Tax The Rebate Or Not

June 20, 2001

As the federal government begins sending out tax-rebate checks this summer, eight states that allow taxpayers to deduct federal income tax from their state tax bills are faced with a problem. Should the rebate recipients be required to include the amounts -- up to $300 for singles or $600 for couples -- on their state tax forms, thereby lowering their deductions and increasing their taxes?

That question is pitting social-service advocates -- who want more state revenues for pet programs -- against taxpayers in the states concerned.

  • The eight states are Mississippi, Iowa, Oklahoma, Louisiana, Oregon, Alabama, North Dakota and Montana.
  • If the rebates are allowed to increase taxable income, taxpayers in most cases would experience an increase of less than $30.
  • But at least five of the states would have revenue windfalls of between $17 million and $29 million, according to projections.
  • Advocates for the poor and homeless are eyeing those funds and fighting all attempts to let taxpayers keep the money.

Their efforts may be doomed. Political observers believe that state lawmakers will shun efforts to collect the extra revenues. Not only is the issue one of high visibility, the prospect of politicians grabbing the money stirs taxpayers' passions.

"There's a level of outrage that the money would be taxable," warns Jeff Boeyink, executive vice president of Iowans for Tax Relief. "People expect to get every dime of it," he adds.

Source: Robert Gavin and Will Pinkston, "Will States Tax the Tax Rebate?" Wall Street Journal, June 20, 2001.

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