July 13, 2009
States Begin New Fiscal Year Following Many Tax Changes
Personal Income, Sales and Excise Tax Hikes Among Budget Shortfall Solutions in Some States
Washington, DC, July 13, 2009 - As a number of states continue negotiating their 2009-2010 budgets nearly two weeks into the new fiscal year, a Tax Foundation study demonstrates that tax hikes are the minority—not the norm—in state capitols around the country.
Although seven states increased personal income tax rates—with a particular focus on high-income filers—three states reduced their rates. In addition to individual income taxes, sales and excise taxes were popular targets for change in 2009.
"So-called 'millionaires' taxes' on high-income people are politically safe targets for politicians to tap in a recession," said Staff Economist Kail Padgitt, who authored Tax Foundation Fiscal Fact No. 177, "Some States Respond to Budget Shortfalls with Tax Increases," with Staff Economist Mark Robyn. The Fiscal Fact is available online at http://www.taxfoundation.org/publications/show/24855.html. "The problem with these kinds of taxes, as evidenced by California, is that soaring revenues in good economic times encourage excessive spending, which leads to an inevitable budget shortfall during downturns."
Robyn noted that California general fund spending ranged between $71 billion and $75 billion each year from 1999 to 2003, but jumped to $99 billion by 2007 - a 31% increase over 2003. In the same time period, inflation increased by 12% and the state population grew just 5%. "States shouldn't assume that revenue surges in good times will continue indefinitely, and the more reliant a state is on high-income earners, the bigger hit that state will sustain when those revenue surges eventually end," Robyn said. "Legislators should adopt wise spending and tax policies that recognize and prepare their states for these economic realities."
Nonetheless, three states - Hawaii, Oregon, and New Jersey - made the jump into double-digit income tax rate territory, joining California for a total of four with top rates exceeding 10%. Hawaii and Oregon now tie for the highest rate of 11%. California, Delaware, New York and Wisconsin also increased personal income tax rates, while Maine, North Dakota and Vermont actually cut rates. A complete list of state individual income tax rates is available on the web at http://www.taxfoundation.org/taxdata/show/228.html.
Four states enacted sales tax increases, with Massachusetts and California hiking their rates by unusually large amounts: 25% and 13%, respectively. Nevada and Minnesota raised their rates by a more typical 5% or so.
Excise taxes—particularly so-called "sin" taxes targeting politically unpopular behavior such as smoking or drinking alcohol—were also common targets for revenue grabs. Ten state increased cigarette taxes: Arkansas (new rate of $1.15), Florida ($1.34), Hawaii ($2.60), Kentucky ($0.60), Mississippi ($0.68), New Jersey ($2.70), New Hampshire ($1.78), Rhode Island ($3.46), Vermont ($2.24) and Wisconsin ($2.52). New York and New Jersey hiked taxes on alcoholic beverages.
On a positive note, the authors highlight some zero tax rates that remained in place, including the seven states (Alaska, Florida, Nevada, South Dakota, Texas, Wyoming and Washington) with no individual income tax (New Hampshire and Tennessee tax interest and dividends but not wages) and five (Alaska, Delaware, Montana, New Hampshire and Oregon) with no state-level general sales tax.
"States that are still negotiating their budgets—especially those with income tax increases on the table—would do well to consider how such hikes have played out in other states," Robyn said.
"When the recession ends, states need to have the right policies in place that will promote economic growth and maintain revenue stability," Padgitt concluded.
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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Fiscal Fact No. 177 can be found online at http://www.taxfoundation.org/publications/show/24855.html.
To schedule an interview, please contact Tax Foundation Manager of Media Relations Natasha Altamirano at (202) 464-5102 or naltamirano@taxfoundation.org.