States Are Awash In Tax Cash, Says Cato Report

by Mike Godfrey, Tax-News.com, Washington

24 January 2006

It seems just yesterday that the individual states of the US were complaining about shrinking tax revenues and an upcoming fiscal crisis. A new report from the Cato Institute shows a diametrically opposite picture.

Chris Edwards, Director of Tax Policy Studies at the Cato Institute says that the nation’s strong economic growth is creating a revenue boom for state and local governments. State and local tax revenues soared 8.1 percent in 2004 and an estimated 7.6 percent in 2005, based on data for the first three quarters of the year.

Both state and local governments are enjoying the surge in revenues: state taxes increased 8.7 percent in 2004 and an estimated 8.0 percent in 2005, while local taxes increased 7.3 percent in 2004 and an estimated 7.1 percent in 2005.

Local taxes have been rising rapidly for years, says the report, because soaring property values have inflated the take from property taxes, which provide about threequarters of cities' and towns' tax revenues.

Noting that by 2005 tax revenues for the 50 states were up 18 percent over the pre-recession peak of 2001, Mr Edwards calls for the states to reduce taxation and not to use their sudden wealth to up spending. The 50 states enacted net tax increases of $24 billion during the past five years, but now they can reverse course and provide major tax relief in 2006, urges the report.

Unfortunately, says Mr Edwards, some states are using the revenue boom to expand their budgets beyond sustainable levels, as many states did during the 1990s. In California, Governor Arnold Schwarzenegger has proposed a general fund budget increase for fiscal 2007 of 8.4 percent, which follows a 9.7 percent increase for 2006. In Maryland, Governor Robert Ehrlich has proposed a general fund (apart from reserve fund) increase for fiscal 2007 of 11.4
percent, which follows a 7.6 percent increase for 2006.

States that combine high income tax rates with high overall tax burdens include California, Louisiana, Maine, Minnesota, Nebraska, New Jersey, New Mexico, New York, Ohio, Rhode Island, Vermont, West Virginia, and Wisconsin. All those jurisdictions are ripe candidates for tax relief in 2006, says the report.

Recommended