US States Rush To Close Revenue Holes

by Mike Godfrey, Tax-News.com, Washingotn

31 July 2009

Falling tax revenues, rising expenditure and widening budget deficits are forcing many US states to make frequent changes to their tax codes to cope with the worst budgetary crisis for several years.

According to the fiscal policy organization the Tax Foundation, many states have started the new fiscal year with tax codes that are “vastly different” compared to just a few months ago. Indeed, the frequency with which tax code changes have come in their first half of 2009 has forced the Tax Foundation into the unprecedented step of publishing a mid-year update to its "Facts & Figures" booklet, which compares the 50 states on 37 different measures of taxing and spending.

"Accurate and timely information on state fiscal issues is more important now than ever, especially as lawmakers in many states continue to struggle with budget shortfalls,” said Tax Foundation President Scott Hodge.

Ten states that passed budgets before the end of the 2009 fiscal year on June 30 made major changes to personal income taxes – including three rate cuts – most of which are retroactive to January 1 of this year. Another four increased sales taxes, and several more looked to "sin taxes" for budget solutions.

The Rockefeller Institute of Government reported recently that taxes collected by the 50 states during the first quarter of 2009 suffered their sharpest year-on-year decline in the 46 years since such data has been available, at 11.7%.

The report’s authors, Institute Senior Fellow Donald J. Boyd and Senior Policy Analyst Lucy Dadayan, warned that such “extraordinary weakness” in revenues, along with continued, if more moderate, growth in expenditures, will make widespread budget shortfalls “highly likely” this year.

“Before this year, optimistic revenue projections led wishful-thinking state officials to increase their state spending commitments,” Hodge states in the updated booklet. “The subsequent drop in revenue sources has resulted in large budget shortfalls. State lawmakers are struggling to choose among reprioritized services and different types of tax increases.”

The latest Tax Foundation "Facts and Figures" shows that Nevada has the best corporate tax environment among the 50 states, scoring a perfect 10 out of 10, while New Hampshire has the worst corporate tax laws, scoring just 2.95.

Nevada also tops the individual tax league, again with a score of 10, but the state shares first place with Alaska, Florida, South Dakota, Washington State, and Wyoming. Maryland props up the individual tax index with a score of 2.06.

Wyoming is also ranked 1st in the Tax Foundation’s Business Climate Index, which measures how each state’s tax laws affect economic performance, scoring 7.53 out of 10. New Jersey props up this index, with a score of 3.92.

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