What Tax Cut?
States are using higher taxes and fees to take back what Uncle Sam is giving away
Many states are galled by the hit they will take because of the federal decision to phase out the estate tax by 2010 and end after this year a tax credit that diverts a share of estate tax to states. At least 18 states are divorcing their estate-tax setups from the federal levy in order to make up the loss. In West Virginia, which faces a $120 million budget shortfall, Gov. Bob Wise has proposed a replacement state levy that could bring in $60 million over the next five years.
New York, Oregon, Connecticut, and Arkansas went against the federal grain last year by increasing personal income tax rates. New York legislators, overriding a veto by Gov. George Pataki, boosted the state's top rate from 6.85 percent to 7.7 percent, which is expected to raise $1.4 billion this year. Arkansas hopes to raise $56 million a year with a 3 percent three-year surcharge.
No smoking. Also on the upswing are sales taxes, fees, corporate levies, and assorted taxes for such things as hotel rooms, entertainment, and motor fuel. A 1 percentage-point hike in their sales taxes is expected to raise $165 million in fiscal 2004 for Idaho, $29 million for Vermont, and $1.3 billion for Ohio. Smokers are also paying more. Georgia, for example, has more than tripled its cigarette tax to 37 cents a pack, and New Jersey upped its tax from $1.50 a pack to $2.05. Even Delaware, known as corporate headquarters-friendly, was forced to increase its business franchise tax. According to a survey by the National Conference of State Legislatures, the total of fee boosts last year was three times the increase in 2002, which itself was more than double the amount in 2001.
While most of the federal tax cuts are scheduled to expire unless extended, many state boosts are also supposed to be temporary and last only two or three years. That means new strains could be coming. While state revenues are showing signs of picking up as the economy improves, and there are proposals in some states to roll back tax hikes, budget deficits still loom. Iris Lav, deputy director of Washington's Center on Budget and Policy Priorities, says that after increased borrowing and implementing stopgap measures, states may find it difficult to "go cold turkey" without those supports. Gov. Dirk Kempthorne of Idaho, whose temporary sales tax boost expires next year, is warning residents now to expect fiscal belt tightening. Ohio's Office of Budget and Management says a proposal to end that state's sales tax increase six months early could set the state back $800 million. Marty Stephens, speaker of the Utah House and president of the state legislatures group, sees "some rays of sunshine on the horizon" but acknowledges that "when government puts on a temporary tax, it sometimes becomes permanent."
Raiding your pocket
A growing number of states are raising billions of dollars through tax hikes.
The number of states that increased taxes...
2000 2
2001 6
2002 15
2003 18
...and the amounts they raised (in billions)
2000 $0.26
2001 $1.83
2002 $5.96
2003 $6.17
Source: Nelson A. Rockefeller Institute of Government
USN&WR
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