Yahoo! News - States Fear Effects of Dividend Tax Cut

Because most states tie their income tax codes to the federal tax code, an end to federal dividend taxes could also result in a loss of state tax revenue.

States could get hurt in another way, too: Bush's proposal could make stocks a more attractive investment than the bonds issued by states and municipalities for building schools, roads and other projects. To attract investors, local governments might have to offer higher interest rates on their bonds, and that would make it more expensive for them to borrow money.

The more you look at this dividend and capital gains tax cut the worse it looks.