Tax collection rates around the country have dropped precipitously in recent months, prompting local and state governments to get tougher and tax more.

During a webcast by KPMG on Tuesday, Harley Duncan, managing director of state and local tax at the firm, cited recent figures from the Rockefeller Institute of Government showing that the first quarter of 2009 marked the largest decline in state tax collections since at least 1963. There is a deficit of over $142.6 billion in 48 states. Some states, including Arizona, California, Connecticut, Florida, Louisiana, Nevada, New Jersey, New York and Vermont, are experiencing a shortfall of more than 20 percent. Duncan noted that the preliminary numbers for the second quarter appear to be even worse.

To address the shortfall, cities and states are trying a variety of ways to raise money quickly, resorting to one-time accounting gimmicks to plug their budget gaps. Tax amnesties are helping bring in money in some states. Other states are leasing assets instead of purchasing them. Some are imposing sin and excise taxes on goods and services such as cigarettes, alcohol and gambling, including taxing the new video-gaming slots at Illinois racetracks.

Expanding the nexus of sales taxes is the strategy being tried in Wisconsin and New York. States such as Massachusetts and California are taxing digital downloads of music and movies. Some states are imposing greater penalties on frivolous tax positions and refund claims to raise more money. Another way to raise revenue is to disallow more tax deductions.

California has probably attracted the most controversy for its use of accounting gimmicks, such as changing the dates of paychecks and increasing payroll tax withholdings earlier in the year, to close its budget gap. In many cases, the state is only paying out IOUs, but interestingly, the state is accepting some of its own IOUs for tax payments. But as KPMG state and local tax partner Anne Holley asked, “How do you accept an IOU from a state and then use it to pay tax?”

Governator Schwarzenegger may not know the answer to that one, but given the cloudy budget prospects, chances are he'll be back with more unusual accounting and tax maneuvers later in the year.

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