The economic stimulus payments that taxpayers have received will not be considered taxable income by the Internal Revenue Service but some of this money may end up in the coffers of individual states, which are free to decide how to treat the payments. Few will tax the money directly as income - currently, only Alabama is considering this option - but most anticipate additional revenue from sales or excise taxes, or indirectly, in some states, from a decrease in a deduction. States that allow taxpayers to deduct federal taxes paid from their income may require a reduction in the deduction for the amount of the rebate.
North Dakota's Office of the State Tax Commissioner says that "because the rebate is not income for federal income tax purposes, it is not income for North Dakota income tax purposes. But taxpayers should note that if Form ND-2 (Optional method) is used, the amount of the federal income tax otherwise allowed as a deduction must be reduced by the amount of the rebate."
Montana's Department of Revenue advises taxpayer that "if you itemize your deductions for state income tax purposes for tax year 2008, your "federal income taxes paid" deduction may be reduced because of this rebate."
Other states where the deduction for federal taxes paid may be affected include Alabama, Iowa, Louisiana, Missouri, Oregon and Utah.
Alabama's Governor Bob Riley may need to call a special session of the state legislature to exempt the stimulus payments from income for state tax purposes, WKRG.com reports. The state's Senate failed to pass an education budget that included the exemption before its regular session ended.
Elsewhere, state budget directors are struggling to estimate the revenue the stimulus payments could generate. In Michigan, Federal rebate checks are expected to increase casino taxes, lottery revenue, and sales tax revenue. But because the new Michigan Business Tax is linked to federal taxable income and businesses will claim an acceleration in depreciation under the stimulus plan, the budget will see a net loss of $127 million over two budget years, the Grand Rapids Press reports.
Mike Allen, the chief forecaster for the Maine Revenue Service is not certain that the state will benefit from the stimulus payments. "Energy prices are going through the roof. Food prices are going through the roof and wages aren't keeping up with either of those two," he said, according to keepMECURRENT.com.
Allen told the legislature's Appropriations Committee he is particularly concerned about sales taxes. The revenue forecast predicted the federal stimulus checks could translate into increased sales tax revenues of $8 million over the summer. "However, the assumption about oil prices was certainly not $135 a barrel," he said. "I don't think those stimulus checks are going to have the same effect."