US States Taxing Their Way Out Of Fiscal Crisis

by Leroy Baker, Tax-News.com, New York

09 June 2009

Despite receiving funds from the American Recovery and Reinvestment Act of 2009, state fiscal conditions deteriorated for nearly every state during fiscal 2009, a new report has shown.

According to the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO), state revenue collections were down 6.1% in fiscal 2009, with two states exceeding their original revenue projections, 10 states meeting their projections and 30 states falling below their projections.

"Revenues have come in below even the most pessimistic forecasts," said NASBO Executive Director Scott D. Pattison. "Plunging revenues have caused the unraveling of state budget plans, continuing to force states to make painful decisions."

The combined state budget shortfall is expected to total more than USD200bn over the next three years. Inevitably, this fiscal pressure has led state governors to propose often unpopular increases in taxation.

In thirty-four states, governors are recommending net tax and fee changes of USD23.9bn, while another 29 states are proposing net tax and fee increases. Only five states have recommended net tax and fee decreases.

The largest change would occur in personal income taxes at USD8.8bn. Of this amount, USD4.7bn and USD2.9bn are accounted for by changes recommended in California and Illinois, respectively. Other tax and fee increases proposed include increases of USD6.5bn in sales taxes, USD5.0bn in fees, USD1.5bn in cigarette and tobacco taxes, USD1.1bn in other taxes, USD539m in corporate income taxes, USD323m in alcohol taxes, and USD87.6m in motor fuels.

According to the report:

Eight states recommended sales tax increases while two recommended decreases in their fiscal 2010 governors' recommended budgets. The result is a net revenue increase of USD6.5bn. Much of this change is due to a proposed rate increase in California that would give the state USD4.8bn.

Ten states recommended personal income tax increases while five recommend decreases for a net change of USD8.8bn. More than half of this change is accounted for in rate increases and credit reduction proposals from California and Illinois that would increase collections by USD4.7 and USD2.9bn, respectively.

Eight states recommended corporate income tax increases while three recommended decreases in their fiscal 2010 governors’ recommended budgets for a net change of USD539m. A rate increase proposed in Illinois accounts for USD470m of this change.

Sixteen states recommended cigarette income tax increases for a net change of USD1.5bn. An increase in the tax rate of USD1 per pack in Illinois proposes to raise USD365m, while a rate increase in North Carolina proposes to raise over USD340m.

Three states recommended motor fuel tax increases while one state proposed a decrease for a net change of USD87.6m. A rate increase in Oregon proposed to raise USD58m.

Six states recommended alcohol tax increases in their fiscal 2010 governors’ recommended budgets for a net change of USD323.1m. Increased tax rates are proposed to raise USD158m in North Carolina.

Fourteen states recommended other tax increases while five states proposed decreases in their fiscal 2010 governors’ recommended budgets for a net change of USD1.1bn. Various measures in Illinois are proposed to raise USD593m.

Seventeen states recommend fee increases while one state proposed a decrease in their fiscal 2010 governors’ recommended budgets for a net change of USD5.0bn. Over 40 proposed fee changes in New York are expected to raise nearly USD2.2bn.

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