States May Take Slice of Bush Rebate Checks

By Seth Lewis | July 7, 2008 | 8:27pm EDT

( - When the Bush tax-rebate checks - $300 for singles, $600 for families - are mailed to taxpayers this summer, they may come with a caveat: It's time to pay taxes on that tax rebate.


Indeed, in at least nine states - and possibly many others - the kickbacks from the $1.35 trillion tax cut may be taxed retroactively, the American Legislative Exchange Council said Wednesday.

"There's the question of whether the states would be so greedy," said Bob Adams, a spokesman with the American Legislative Exchange Council. "The answer is - unless you've been living under a rock lately - absolutely, positively yes. States spend every dime they can get their hands on."

States may be especially eager to carve out a share of the tax rebates after the Bush plan killed the estate tax, a move the National Governors Association estimated would cost states between $50 billion and $100 billion in future revenue.

But Republican lawmakers in Iowa - one of the nine states with tax codes requiring retroactive taxes - are already taking steps to exempt the latest refund.

GOP officials estimate Iowans would receive $404.9 million in rebates - and then have to pay back $20.2 million on a 5-percent state tax. So lawmakers are drafting special-session legislation to tweak the tax code.

It's that upcoming vote that may be the silver lining to this tax-rebate wrinkle, says the anti-tax lobby group Americans for Tax Reform.

"It could wind up being a real help with state Republicans," spokesman Robert Funk said.

That's because a vote against the exemption in Iowa, for instance, will come back to haunt lawmakers who wanted to double-tax their constituents, Funk said.

"It's kind of a strange little quirk in these tax laws," Funk said, "but we can definitely turn it into something positive."

At least nine states - Iowa, Alabama, Louisiana, Missouri, Montana, North Dakota, Oklahoma, Oregon and Utah - will consider the refunds taxable, and other states may do the same depending on how they interpret existing laws.

"It all boils down to how the state looks at the rebate," Adams said.

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