February 11, 2009
Tax Foundation Special Report Takes Fiscal Snapshots State by State, Makes Recommendations to Lawmakers on How to Face Tough Fiscal Times
Washington, DC, February 11, 2009 - While many states that have budget shortfalls are seeking federal bailouts, proposing targeted tax increases and calling for hiring freezes, these shortfalls are actually an opportunity for fundamental tax reform, according to a recently completed Tax Foundation study.
In Tax Foundation Special Report No. 164, "State Budget Shortfalls Present a Tax Reform Opportunity," Tax Foundation Director of State Projects Joseph Henchman reports that forty-five states face budget shortfalls of varying degrees, totaling approximately $132 billion through fiscal year 2010. However, every state but one expects revenues in 2010 to be higher than in 2006, and all but nine states have seen revenues grow faster than inflation from fiscal years 2006 to 2009.
"States hit hardest are those that relied most heavily on growth in unstable revenue sources like taxes on capital gains, high-income earners, and corporate profits," Henchman finds.
Henchman argues that punitive taxes on unpopular groups, such as smokers, drinkers, or high-income earners, are poor tax policy and a source of instability because they force a small group of people to pay for government services broadly available to all citizens.
"Shifting the burden of paying for these programs away from most taxpayers can result in demands for more government than people are actually willing to pay for," Henchman says.
One popular gimmick increasingly seen at the state level is the "Washington Monument" ploy, a catch-all term describing a tactic that governments use to protect their budgets. Officials warn that unless new revenue is found, vital and politically popular government programs will have to be curtailed or eliminated.
"The intention is not to close these programs, but rather to create public pressure against spending cuts and for tax increases," Henchman states.
Furthermore, Henchman recommends to lawmakers that during budget squeezes, opportunities for fundamental tax reform must be taken advantage of.
"By broadening tax bases and lowering rates, states can generate extra revenue while bringing the state tax system back to the basic principles of good taxation: simplicity, transparency and neutrality."
Special Report No. 164 can be found at http://www.taxfoundation.org/publications/show/24321.html.
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
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