US States To Grapple With Taxing Issues In 2009

by Mike Godfrey, Tax-News.com, Washington

14 January 2009

2009 is expected to be a trying year for state government finances as state legislatures make an effort to develop tax policy that will stave off hard times, according to tax and advisory firm Grant Thornton.

"In searching for ways to fill the gap between expected revenues and expenditures, state legislatures will be toeing a fine line between encouraging growth to stimulate the state and local economy and enacting revenue-raising provisions," said Giles Sutton, a Grant Thornton Tax partner and the state and local tax (SALT) Technical Services practice leader. "Many of these will be couched as 'loophole closers' and 'clarifications,' instead of pure tax increases."

"With historic deficits expected, many states will need to make cutbacks on certain types of services, tap rainy-day funds and raise taxes in order to balance the budget," added Jamie Yesnowitz, a SALT senior manager in Grant Thornton's National Tax Office. "Taxes could be raised through pure rate hikes, expansions of the tax base and elimination of exemptions. However, many states will have to overcome checks on the power to unilaterally increase taxes, including supermajority provisions and in some cases, state constitutional prohibitions."

Referencing a sampling of the states’ budgetary woes by the Center on Budget and Policy Priorities (CBPP), Grant Thornton noted that the figures paint a grim picture: at least 43 states face budget shortfalls in their budgets for this year, and/or next year. According to the CBPP:

• California faces a budget deficit of USD30.6bn in FY2009, more than 30% of the state’s FY2009 budget, an amount that may force the state and many of its localities into bankruptcy.
• Florida faces a budget deficit of USD5.5bn in FY2009, more than 20% of the state’s FY2009 budget.
• Illinois faces a budget deficit of USD3.8bn in FY2009, more than 13% of the state’s FY 2009 budget, a problematic gap in a state currently going through tremendous political upheaval.
• New York faces a budget deficit of USD6.4bn in FY2009, more than 11% of the state’s FY2009 budget, an amount that is sure to rise as the fallout from the financial crisis continues to unfold.
• Several other states with budget deficits that are smaller in magnitude have deficits that represent a substantial percentage of their total budget, including Alabama, Arizona, Delaware, Georgia, Minnesota, New Jersey, Nevada, Rhode Island, South Carolina, Tennessee, Vermont and Virginia.

Grant Thornton has identified several options that will be considered by state legislative bodies in 2009 as methods by which states attempt to balance their budgets. These include: increasing rates of sales tax and expanding the sales tax base; 'decoupling' from future federal economic stimulus packages; increasing levels of disclosure; delegating more power to state tax authorities; introducing more hybrid/gross receipts corporate taxes; shifting from separate to combined reporting; considering more targeted tax credits and business incentives; changing estimated tax payment rules; insisting on more electronic reporting; and advancing the agenda of the Streamlined State Sales Tax Initiative.

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