State tax troubles, too

Unfortunately, that news isn't so good either. Don't shoot the messenger, I'm just telling you what I found, or rather, what the Nelson A. Rockefeller Institute of Government found.

The Rockefeller Institute is the public policy research arm of the State University of New York in Albany, and its Fiscal Studies Program has been looking into policy and trends affecting all 50 states since May 1990.

What researchers saw for the first quarter of 2008 wasn't pretty. State tax collections then were at their weakest in five years, according to the Institute's report, with sales tax collection, a key revenue source for most states, coming in flat for the first three months of this year. That's the first time in six years that has happened.

While you, as a taxpayer, might think this is good news, it's not. If your state isn't getting enough money, it's either going to cut services or find another way to tax you.

Yeah, I know, all governments are full of waste, and one taxpayer's valuable benefit is another's money down a rat hole. But if things get so bad that a lot of programs are reduced or eliminated, one of them will eventually affect you. And it's never fun when budget cuts hit home.

Now I'm not advocating that governments have carte blanche to tax willy-nilly. But neither should citizens expect them to run, or run well, on shoestring budgets. Some sense needs to be used on both sides. And the color of the sky in my wishful thinking world is a nice mauve.

Tightest budgets: Is your state in dire fiscal trouble thanks to lagging tax collections? It is if you live in Arizona, Montana and Florida. These states saw revenue declines of more than 10 percent, much of it no doubt due to high foreclosure rates that meant property taxes dropped.

A dozen other states also experienced slightly smaller revenue declines from January through March, according to the Rockefeller Institute survey. They are: Georgia, Idaho, Mississippi, Nebraska, Nevada, New Jersey, North Carolina, Ohio, Oklahoma, Rhode Island, South Carolina, and Utah.

But a handful of states -- Alaska, Iowa, North Dakota and West Virginia -- actually recorded tax collection increases of more than 10 percent.

Hopeful Hoosiers: Indiana isn't on either of the Rockefeller Institute's extreme tax collection lists, but the Hoosier State's governor apparently thinks his state is doing OK and he wants to literally share the wealth with residents.

This week, Gov. Mitch Daniels called for a refund plan that would give taxpayers money whenever the state's surplus is large enough. Under the proposal, Indianans who file a state tax return would get a credit whenever the state has a surplus that exceeds a predetermined amount of the next year's budgeted spending.

Of course, there is the flip side. When the state legislature increases the budget to meet various needs, or if an economic downturn cuts into Indiana's fiscal reserves, taxpayers wouldn't get the refund.

The Indianapolis Star reports that an analysis by the governor's office of state finances going back to 1992 showed such credits would have been possible in at least four years, 1995 through 1998. In 1995, the average refund check would have been $144 for each person filing an Indiana return, double that for couples filing jointly.

Not that I'm a cynic or anything, but isn't it interesting that such a proposal appears just a couple of months before election day?

Home-sale law change update: A quick shout out to blog readers who wrote after my earlier post on the change to the home-sale tax exclusion when it comes to second homes that are converted to principal residences. I got your questions and am working on a story that will elaborate on this new law. Thanks for reading, writing and your patience while I flesh out this topic.

Second-home sellers take a tax hit

The beauty of most federal legislation, and this housing bill in particular, is that there are always plenty of provisions to go around. So I'm going to look at yet another housing-related tax section in the bill.

Unfortunately for me, while Holden talked about some of the new law's tax breaks, I'm looking at a change that's going to cost some folks.

Yep, the sad fact of tax breaks is that they have to be paid for somehow. And part of the new housing law's $15.1 billion price tag is being charged to homeowners who at some point rented their house or used it as a second residence.

Under law that's in effect until Dubya signs the housing bill, homeowners can exclude from taxation profits on the sale of their home to the tune of up to $250,000 if they're single taxpayers, $500,000 if married filing joint returns.

This great tax break has one main requirement. You must own and live in the property as your main residence for two of the five years before you sell it.

A lot of property owners took advantage of that to convert a vacation home or rental house to a primary residence. They just moved into the place, lived there for a couple of years, sold and pocketed the tax-free profit.

Now, however, when they sell such homes on or after Jan. 1, 2009, they will have to factor out those periods and pay taxes on that portion of the profit.

Here's an example:

Jim and Joan are in their 50s and next January buy a vacation home for $200,000. Ten years later, they retire, sell their old principal residence and make the vacation home their new principal residence. Fifteen years after that, Jim and Joan, now in their 80s, move to an assisted-living community and sell the vacation-turned-primary-residence for $700,000. That nets them a gain of $500,000.

Under pre-housing bill statute, Jim and Joan wouldn't face any tax on the entire $500,000 gain.

The new law, however, means that Jim and Joan can exclude only 15/25, or 60 percent, of the gain. That would give them $300,000 of nontaxable property sale profit and $200,000 upon which they would owe long-term gain taxes.

"These possibilities may complicate planning for people looking at a second home," says Mark Luscombe, principal tax analyst for CCH, a Wolters Kluwer business. "It may also have the effect of depressing the market for vacation property, something that legislators may not have intended."

And some folks who are in the process of converting a second home to their main residence right now could be out of luck. If they don't have enough time left in 2008 to meet the two year lived-in rule and dispose of the property, then when they do sell next year, they'll pay.