NCPA - National Center for Policy Analysis


April 10, 2009

A free fall in tax revenue is driving more state lawmakers to turn to broad-based tax increases in a bid to close widening budget gaps, says the Wall Street Journal.  At least 10 states are considering major increases in sales or income taxes, but the squeeze is especially severe in states hit hardest by the recession, such as Arizona, where sales-tax revenue has fallen by 10.5 percent, income-tax collections are down 15.7 percent and the government faces a $3.4 billion budget gap next year.

Such shortfalls are likely to be widespread; federal income-tax receipts from individuals have dropped more than 15 percent in the past 6 months.  And while most states so far have managed to cope with dwindling cash by cutting spending and raising fees that is unlikely to be enough in the new fiscal years, says the Journal:

  • Sales-tax revenue has fallen more sharply than at any time in the past 50 years, and income-tax collections are expected to drop below projected levels -- though the extent of the damage probably won't become clear until May.
  • Raising taxes is a perilous proposition for lawmakers, who must balance their budgets every year, yet, some lawmakers say they have little choice; some states are looking at closing down courts, releasing prisoners and cutting the school year by as much as a month.
  • Nevertheless, some governors are proposing tax increases; Delaware Gov. Jack Markell wants to raise the marginal income-tax rate by one percentage point, to 6.95 percent, on those earning more than $60,000 a year, effective in 2010.

However, many states remain determined to balance their budgets by relying solely on spending cuts and some have lowered revenue forecasts repeatedly in recent months.  Yet the estimates still seem to exceed the grim reality, says the Journal.

Source: Leslie Eaton, "More States Look to Raise Taxes," Wall Street Journal, April 9, 2009.

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