Year End Review of State Tax Law Changes

The Tax Foundation has a new report out looking at the changes in state tax law this year. Director of State Projects Joe Henchman writes:

During most of this decade, state lawmakers responded to surging tax revenue by boosting state spending growth to an unsustainable level. Now that boom has turned to bust, significant structural budget deficits have opened up in many states. Throughout 2009, state officials struggled to close these gaps. They face three choices to meet their budgetary obligations.

One option is to raise taxes. Officials generally claim that the budget cannot or should not be cut any further, and that the benefits of tax increases for the state budget outweigh the economic damage they can do in an economic downturn. Most states taking this option aimed their taxes at specific groups such as high-income earners, smokers, or out-of-state business transactions. These revenue sources may provide short-term relief but can cause substantial economic harm to the state economy in the medium and long term.

The opposite approach is the second option: roll back spending growth commitments made during previous years and take actions to spend no more than the state brings in. Arkansas and Indiana have taken this path.

The final and politically easiest option is to use one-time funds and accounting gimmicks to paper over the current state budget shortfall, but without significantly curtailing spending. This irresponsible approach amounts to praying that the economy will soon recover and bring a surge of tax revenue. California has taken this path for several years in addition to raising already-high taxes, building up to a crisis in 2009 when the state issued IOUs, borrowed, seized funds from local governments, and enacted requirements that companies increase withholding to 110% of what workers owed-in essence an interest-free loan to the state.

Other factors in these decisions have been the draw down of rainy day funds by most states (Texas notably has several billion dollars remaining), the availability of one-time stimulus aid but with strings that forbid cuts to huge swaths of state budgets, and increasing abuse of state Medicaid matching funds as a way to shift state general spending to the federal taxpayer.

The report goes on to detail tax law changes in these categories:

  • State Changes to Individual Income Taxes
  • State Changes to Sales Taxes
  • State Changes to Cigarette Excise Taxes
  • State Changes to Alcohol Excise Taxes (Beer, Wine, and Spirits)

The report also looks at miscellaneous taxes like D.C.’s plastic bag tax and proposed obesity taxes. See all the juicy numbers and details here.