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Quiet Year, So Far, For US State Taxation

by Mike Godfrey, Tax-News.com, Washington

13 August 2012


In its latest State Tax Update, the National Conference of State Legislatures (NCSL) has depicted the first half of 2012 as a ‘notably quiet year’ for US state taxes, with only five states reporting sizable net tax changes, and with the smallest aggregate tax cut in the 32-year history of the report.

However, the NCSL stressed that the overall impression created in 2012 so far did not mean that nothing happened in state taxation, with several states reporting significant activity. However, the changes made either had no substantial revenue-gathering implications, or tax changes in different categories offset each other and reduced the net effect.

The small aggregate tax cut of USD1.5bn, or 0.2%, was made up, in the main, by reductions in personal income taxes. Idaho, Kansas and New York reduced taxes by more than 1% and Illinois and Maryland increased taxes by more than 1%, but 45 states made no significant net tax change.

The study pointed out that Kansas, New York and Michigan made the largest decreases in individual income tax. For example, an income tax reform package in Kansas should reduce revenues by USD250m this fiscal year, and by USD850m next year. New York’s temporary income tax surcharge expired at the end of 2011, followed by a restructuring of its tax brackets to cut taxes for most.

The only categories in which states raised more taxes than they cut were tobacco and miscellaneous items. The largest increase, of USD373m, was in tobacco taxes; largely due to a rate increase in Illinois. Miscellaneous items modified by some states concerned estate, gaming, severance and vehicle taxes.

The NCSL, however, has identified a few common themes in its analysis – “a continued focus on high-income earners, changes to inheritance and estate taxes, and the use of incentives to hire veterans and to attract new business.”

The report noted that the quietness of 2012 could change markedly in November when Californian voters decide on three separate ballot measures. Of those, Governor Jerry Brown’s plan would result in large broad-based tax increases or around USD10bn to help close a USD15.7bn state fiscal deficit, by temporarily raising the state sales tax to 7.5% from 7.25% for three years and hiking individual tax rates on incomes of USD250,000 and above for seven years.

In its sister study, the State Budget Update, the NCSL reported that, “state finances have yet to enjoy a robust recovery. While there are signs of improvement, the turnaround has been slow and uneven across the US. Moreover, the new found flexibility that lawmakers expect from improving revenues may be hobbled by mounting budget pressures. The bottom line: State budgets still face considerable challenges.”

It felt, however, it did find that “state budgets today are better positioned to handle these challenges,” with “more states shoring up their rainy day funds.” It decided that, overall, “the economic outlook for the current fiscal year is stable for the vast majority of states.”

TAGS: tax | economics | business | sales tax | fiscal policy | vehicle tax | budget | excise duty | tax rates | United States | tax reform | individual income tax

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