State Budget Gaps Top $200 Billion; Fees, Tax Hikes in the Works

By: - April 24, 2009 12:00 am

Even with federal stimulus dollars flowing into the states, many Americans will feel the pinch as states look to take a bigger cut from everyday activities to help balance budgets through 2010 that are in the red by more than $200 billion, new figures show.

If you rent a car in Colorado, download a cell phone ring tone in Kentucky, earn more than a half-million dollars in New York or buy a car or laptop in California, you’ll already have to dig deeper in your wallet because those states have hiked taxes or fees to balance their ledgers.

At least a dozen states have either raised the sales or income tax or are seriously considering it. Hundreds of new or higher fees for a variety of services also are pending in nearly half of all states, which are scrambling for more revenue to offset plunging tax receipts.

“We’re seeing a blizzard of fees to help states balance their budgets,” said Sujit CanagaRetna, senior fiscal analyst for the Southern Legislative Conference of the Council of State Governments .

After already cutting $40 billion, states expect to have to slice another $62 billion to make their current budgets balance, the National Conference of State Legislatures said in its latest survey of states’ fiscal health, released April 23.

Four months ago, NCSL figured states would have to close shortfalls of $85 billion for fiscal 2010 budgets. Now that number has ballooned to $121 billion. Similarly, the National Governors Association has estimated budget gaps could top $230 billion through 2010.

Most states are busy now working on those budgets, which begin July 1 for all but four states, trying to figure out how to factor in the federal stimulus money. All but Arkansas, Missouri, North Dakota and Wyoming expect budget gaps for the new fiscal year, NCSL said.

Politicians of both parties have responded to the fiscal crisis with dramatic tax proposals. Consider this:

  • Illinois Gov. Pat Quinn, a Democrat, suggested increasing the state income tax by 50 percent – from 3 percent to 4.5 percent.
  • Arizona Gov. Jan Brewer, a Republican, has called for a temporary $1 billion tax hike, but hasn’t disclosed which taxes.
  • Idaho Gov. C.L. “Butch” Otter, a Republican, has vowed to keep vetoing legislation until the Legislature gives more money for roads and bridges, raised by a 10-cent increase in the gas tax and increases in vehicle registration fees.
  • Although unlikely to succeed, a proposal in Nevada would tax legal brothels and a California lawmaker wants to regulate and levy a -per-ounce tax on the sale of marijuana in California.

Fee hike proposals are even more plentiful – from higher divorce costs in Florida, death certificates in Oregon to state park passes in Michigan. Some governors pitched literally hundreds of fee hikes, including Connecticut Gov. M. Jodi Rell (R), who recommended increases ranging from the cost of driver’s licenses to handgun permits. And in Wisconsin, Gov. Jim Doyle (D) proposed a new fee on each pig and cow slaughtered.

But smokers, drivers and happy hour imbibers may feel the biggest squeeze. Nearly half the states are looking to boost their take on tobacco products and at least nine are eyeing alcohol. Proposals to increase the gas tax and vehicle registration appeared in nearly a dozen states.

Anti-tax sentiment is still strong – the nationwide “tea parties” held April 15 to protest government spending at all levels illustrate that. But at the state level, politicians of both parties still are resorting to higher taxes and fees to plug holes in their budgets that the federal stimulus money wasn’t able to fill.

Californians are already feeling the pain. A 1-cent increase in the state sales tax went into effect April 1, forcing consumers to pay more for goods ranging from laptops to toys. California relied on $12.5 billion in tax increases to help erase a $41 billion shortfall in its current budget, including a one-quarter of 1 percent increase in personal income tax rates and a 1 percentage point hike in the sales tax, to 6 percent. The new taxes, including a higher vehicle license fee, are for the next two years, but could be extended another two if voters approve a state spending cap when they go to the polls May 19 in a special election.

New York in March closed a $17.7 billion deficit, in part, by raising fees and taxes by $6.2 billion, including higher taxes on wireless devices, cigars, beer and wine. The state also boosted registration fees for motorcycles, cars and boats; increased hunting and fishing licenses and is requiring, for the first time, saltwater fishing licenses.

Critics say New York’s budget could have been worse. New York Gov. David Paterson (D) proposed more than 100 new or increased user fees, including an 18 percent “fat tax” on soda drinks and a 4 percent sales tax on downloaded music, both of which he later dropped.

Here’s a run-down of the some of the fees and taxes that are on states’ radar:

“Millionaire’s” tax: An emerging trend this year is to slap a higher tax on the wealthy, dubbed the “millionaire’s” tax. New York increased to 8.97 percent the income tax on those who earn more than $500,000, up from 6.85; those making more than $200,000 would be taxed at 7.85 percent. New Jersey is considering raising income taxes on those who earn more than $500,000 while the threshold is $225,000 in Wisconsin. Other states with proposals to raise income taxes on the rich are Connecticut, Delaware, Illinois, Massachusetts, Michigan, Minnesota and Washington.

Sales tax : California approved a 1-cent increase in the sales tax to generate $1 billion in the first year. Similar proposals are pending in Arizona and Massachusetts. Kentucky added sales taxes to digital products, such as software and cell phone ring tones. Rhode Island Gov. Don Carcieri (R) has called for reducing the sales tax to 5 percent from 7 percent, but adding services that are taxable, such as veterinary purchases. Illinois Gov. Pat Quinn (D) wants to tax personal hygiene and coffee products in grocery stores. Florida is considering eliminating sales tax exemptions on items ranging from Super Bowl tickets to bottled water.

Corporate income tax : Governors of Delaware, Florida, Illinois, New Jersey, Oregon and Wisconsin have proposals that would raise taxes for companies, ranging from extending the 4 percent business tax surcharge that was set to expire in New Jersey to levying a 3 percent tax on oil companies’ profits in Wisconsin.

Car and motor fuel taxes: Vehicle car registration went up in California and Utah, and the car rental tax has been raised by $2 a day in Colorado. Idaho eliminated the 10 percent tax exemption on ethanol. Governors of Connecticut, Idaho, New Jersey and Oregon proposed increasing vehicle registration fees while motor fuel tax increases were proposed in Florida, Idaho, Illinois, Massachusetts, Michigan, Oregon and Texas.

“Sin” taxes: Arkansas, Kentucky and Rhode Island increased their cigarette taxes by 56 cents, 30 cents and $1 a pack, respectively. Both chambers of the Mississippi Legislature approved an increase but at different levels, so lawmakers there will take it up when they reconvene in May or June. Tobacco tax proposals fell in Georgia, Utah and Wyoming, but are still pending in at least 15 other states. New York raised its tax on beer and wine, and Kentucky ended its tax exemption of alcoholic beverages. Higher alcohol taxes are on the table in California, Hawaii, Massachusetts, Michigan Nevada, New Jersey, North Carolina and Oregon.

See Related Stories:
Report: Sales tax collections hit 50-year-low (4/14/2009)
Stimulus tax breaks threaten state revenues (4/7/2009)
Report: State tax revenue takes a dive (3/12/2009)
Stimulus to ease, not fix, state budget woes  (2/14/2009)
Conflicting budget estimates abound (2/3/2009)
Budget gap could widen to $200 billion (12/15/2008)
Depressed economy wallops states (10/24/2008)
23 states face budget gaps in ’09 (4/25/2008)

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