The other shoe: Tax cuts in stimulus bill will increase Minnesota deficit by $120 million

As it turns out, the shower of federal dollars that came to Minnesota with the passage of the American Reinvestment and Recovery Act has brought a sprinkling of red ink as well. The Minnesota Department of Revenue today released its estimate of the dollars the state will lose as a result of adopting the tax cuts that were placed in the federal bill in a vain effort to win over Congressional Republicans.

Minnesota’s total lost revenue for FY2010 is expected to be $122 million, followed by lesser losses in the next three years: $27.5 million in FY11, $9 million in FY12, and $10 million in FY13. Technically speaking, one legislative analyst tells PIM, "Most of the cost in each year is from the deferral of certain discharge of indebtedness income for corporations and individuals."

The $122 million hit this year would raise Minnesota’s current budget deficit estimate to nearly $4.7 billion. But the Department of Revenue memo distributed today (PDF link) cautions that the tax provisions of ARRA, like its spending provisions, are murky: "At this point, it is not clear the type and magnitude of the situations to which this [discharge of indebtedness] provision will apply and to what extent it will affect Minnesota taxes."

Because of the ambiguity, estimates of the total cost to U.S. states stemming from the ARRA tax cuts are hard to come by. Nationally, the tally could run anywhere from $4 billion to $60 billion for FY10 and FY11, according to an Associated Press story published earlier this week.