Lacking Congress’ ability to address problems with deficit spending, financially squeezed state legislatures across the country are considering desperate tax increases that would have been politically unthinkable just a few years ago.

With the legislatures talking seriously about new taxes on everything from used cars to insurance policies, nervous taxpayers are turning to their accountants for advice on softening the impact from these tax hikes.

Behind the growing willingness of both Democrats and Republicans to consider taking a bigger bite out of local taxpayers is a dwindling revenue stream for state governments throughout the nation that’s causing deep cuts in social programs, delays in essential infrastructure repairs, and layoffs and furloughs for state and municipal employees.

State lawmakers received even more sobering news when the Rockefeller Institute of Government reported a painful 4.1 percent decline in nationwide state tax revenues for the fourth quarter of 2009 – the fifth consecutive quarter of reduced tax collections for state treasuries.

In some states the drain has become a full-scale hemorrhage. Arizona’s tax revenues are off by more than 17 percent from the levels of a year ago, and in Oklahoma collections are down more than 26 percent.

With no relief in sight and discretionary spending already cut to the bone, the pressure is mounting for state legislatures to stop the revenue drain with heavier taxes.

In Illinois, where a record $13 billion budget deficit has spawned talk of cutting pensions for retired state workers, lawmakers are warming to the idea of a stiff 5 percent increase in the individual income tax rate, plus an even bigger 6.4 percent hike for corporate taxes.

Lawmakers in Washington State opened the door for a series of tax increases on families and businesses by suspending a voter initiative that had required a two-thirds majority vote by the legislature to raise taxes. Changes in the cards there include a “temporary” hike in the state’s sales tax, an extra $1 per pack cigarette tax, and the elimination of a number of personal income tax exemptions, including a break on the value of trade-in cars and an exemption for certain out-of-state purchases.

In Arizona, where officials have already closed prisons, cut 300,000 recipients from the Medicaid program, and slashed wages to state employees by 5 percent, lawmakers are debating a new sales tax to close a $2.6 billion budget shortfall.

Nowhere are the state budget problems more intractable than in California, where lawmakers in Sacramento voted last year to extend the sales tax to all online sales – a bill that Republican Gov. Arnold Schwarzenegger vetoed. Since then, however, the state’s fiscal difficulties have become even worse, and the legislature is vowing to send the Internet “nexus” bill back to the governor with a veto-proof majority.

Other tax hikes being talked up to close California’s $20 billion deficit include a new statewide fuel excise tax, and a new 4.8 percent tax on residential and commercial insurance policies.

Wrestling with a projected $1 billion budget shortfall, Georgia’s legislature is considering a 1 percent income tax surcharge on those earning over $400,000, a new $1 per pack tax on cigarettes, a new 1.6 percent “fee” on premiums charged by managed care insurers, and a 1.6 percent tax on hospital patient revenues.

Still other states are trying to avoid boosting the tax burden on individuals by pushing higher taxes on corporations and more rigorous enforcement of existing business taxes.

North Carolina – one of only a handful of states to generate increased tax revenues last year – achieved its 11.4 percent revenue gain by ratcheting up its efforts to collect outstanding corporate income taxes.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access