For states, time to raise taxes

Slowing economy has sapped budgets - and some states tiptoe toward tax hikes.

In states across the nation, one of the most significant eras of tax-cutting is drawing to a close.

Thanks to a slowing economy, states are having to take extraordinary actions to balance their budgets. In some cases, that means postponing tax cuts - or even pondering politically unpopular tax hikes.

So if you just got a $300 rebate check from Uncle Sam, enjoy it. Such largess from your state treasury looks unlikely.

State lawmakers have already imposed new taxes on items such as cigarettes or rental cars - levies that will bring in needed cash at a low political cost.

In Tennessee and North Carolina, states where budget shortfalls are most serious, lawmakers have considered the more controversial step of raising income taxes - and faced a series of angry revolts by residents.

Such moves, coupled with news this week that the federal budget surplus is fast dwindling, come as an unwelcome surprise to many taxpayers. In fact, both state and federal politicians now face difficult choices.

"It's been 10 years since states have seen real revenue problems," says Kevin Carey, an analyst at the Center on Budget and Policy Priorities. "If the stagnant growth continues for another year or two, then you might see a lot of states in a situation like Tennessee or North Carolina."

Already, budget shortfalls are affecting everything from foster care funding in Missouri to the federal budget surplus - where plunging forecasts have curbed Republican hopes for corporate tax breaks.

"First of all, there won't be any more tax cuts," says John Spratt (D) of South Carolina, the ranking Democrat on the House budget committee. Some planned tax credits may not go through, he adds.

At the state level, after more than half a decade of lowering taxes, the prospect of tax hikes has stirred strong emotions.

In Tennessee, a mob of voters stormed the state Capitol in July, breaking windows, after hearing that the legislature planned to institute an income tax (the state does not currently have one). Lawmakers scrapped the tax, but covered the budget gap only by factoring in four years' worth of tobacco settlement money.

Gov. Don Sundquist (R), whose veto of the plan was overridden, called it "full of reckless disregard for our state's future."

North Carolina lawmakers are a month late passing a budget, after deadlocking over a plan for a $440 million tax increase - or big spending cuts. Hundreds of residents held a "Tarheel Tea Party" in Raleigh to protest the proposed tax hike.

In New Hampshire, residents of two towns have recently circulated a petition threatening to secede over tax issues. The state, with no income or sales tax, has raised property taxes to give court-mandated funding to poorer school districts.

In New York, after months of failing to agree on a budget, Gov. George Pataki (R) has actually sued the legislature in a dispute over constitutional powers.

The conflicts in these states represent the most extreme cases, experts note, and the woes may be partly self-made. Because New Hampshire and Tennessee had fewer sources of revenue in the first place, they were more quickly hit by the economic slowdown.

While most states made tough choices, they generally passed balanced budgets.

Even California, which had to face an unprecedented power crisis, is not in dire shape. Tax revenues there have shrunk, but the nation's most-populous state still is paying into its rainy-day fund.

"It's nowhere near as bad as it has been in the past couple of recessions," says Donald Boyd, a policy analyst at the Nelson A. Rockefeller Institute in Albany, N.Y. "What we've seen so far is that states have dealt with their fiscal difficulties. And ... they did the easy thing first."

Those easy moves involve drawing on rainy-day funds or imposing small, noncontroversial taxes. Measures include:

• Nevada imposed a tax on car rentals, a potentially lucrative revenue source, given the state's large tourist trade.

• West Virginia is taxing video poker for the first time.

• Maine and Wisconsin are raising cigarette taxes.

Antitax advocates don't see these steps as much better than higher income taxes.

"Nickle and diming the taxpayer has become a political art over the years, but the outcome is the same," says Pete Sepp, a spokesman for the National Taxpayers Union, an antitax group in Washington. While proposing small increases in a number of taxes may "diffuse some of the political heat," the real solution, he contends, is for states to cut spending.

In several cases, state governments are coming under fire not for raising taxes but for failing to lower them as promised.

"This has been a tough issue for some states to deal with," says Mr. Carey, the Washington-based budget analyst. "States that have these phased-in tax cuts are grappling with [them]" because there's tremendous political pressure to continue, yet money is hard to come by.

He cites Virginia's elimination of its car tax. Many residents strongly support the move, which was central to GOP Gov. James Gilmore's campaign. But with revenues falling, critics say Mr. Gilmore has used fuzzy accounting to keep the tax cut.

Other states have "surplus kicker laws" - laws mandating that a budget surplus gets kicked back to taxpayers if revenues exceed those of previous years by a certain amount. They have found that this year, for the first time in a while, they will not be sending out any checks to residents.

Indeed, Mr. Sepp says many Americans "may find that the federal rebate they receive this year is the only check coming in the mail from a government."

Staff writer Francine Kiefer in Washington contributed to this report.

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