States, localities respond to Federal stimulus legislation.

• Author: Smith, Annette B.
• Position: Bonus-depreciation deduction

The Job Creation and Worker Assistance Act of 2002 enacted legislation that, according to state and local government groups, will probably reduce tax revenues by billions of dollars over the next three years, when they will be facing budget shortfalls and skyrocketing costs for education, healthcare and transportation. This projected impact derives primarily from the new law's bonus-depreciation and net operating loss (NOL) carryback provisions.

Approximately 20 states have tax laws that automatically conform to Code changes. At the same time, many of these states enacted their own versions of some Code provisions (e.g., by adopting different NOL periods or different depreciation methods). Other states must enact legislation after each Federal law change to have conforming rules in their tax laws.

Some states have begun decoupling from automatic conformity to the Code as a way to limit the impact of Federal legislation. For example, Virginia, which historically adopted the Code, decided to link its tax law to the Code as of Dec. 31, 2001. Nebraska enacted legislation requiring taxpayers to add back 85% of any bonus-depreciation deduction claimed in computing Federal taxable income.

Maine, taking somewhat of a "wait and see" attitude toward the Federal legislation, recently enacted legislation that permits taxpayers to claim the 30%-bonus-depreciation deduction for 2001 and later years, but requires an addback if there is insufficient revenue to fund the conformity. In addition, the legislation restricts the carryback of an NOL arising from a tax year beginning or ending in 2001 to two years, and eliminates NOL carrybacks for tax years beginning after 2001.

Massachusetts enacted legislation decoupling from the bonus-depreciation rules that grant taxpayers that claimed a bonus-depreciation deduction prior to enactment a waiver of interest for 180 days on any additional tax payments. A new Maryland law prohibits taxpayers from claiming the bonus-depreciation deduction or the extended NOL carryback period for losses generated in 2001 and 2002. In general, the law defers the impact of future Federal tax law changes for one year, to the extent they cost the state $5 million or more in lost revenue.

Minnesota indicated that it may be a while before taxpayers will know whether the state will adopt the provisions of the Federal stimulus legislation, and directed taxpayers to "play it safe." Accordingly, taxpayers were advised to add back any...