States collect more taxes, easing fiscal woes

For the first time since weathering their worst fiscal crisis in more than 60 years, most states are again filling their coffers with enough money to pay their bills.

In 2003, more than 40 states had to bridge yawning budget deficits. This year, only three of them expect their revenues to fall short.

As the economy has recovered, increases in revenues from personal income taxes - which make up more than a third of all state tax collections - have helped improve the financial positions of states. In 2004, state authorities estimate that revenues from personal income taxes were up 8 to 10 percent across the country.

Yet the increase in revenues doesn't necessarily mean taxpayers were taking an extra hit. While they may actually be shelling out more dollars to keep the state police on patrol and high school gymnasiums from leaking, most people aren't paying any more as a percentage of their income.

The reason: Despite severe budget shortfalls a few years ago, most states did just about everything they could to raise revenue without increasing income taxes.

"The good news is that, for the most part, the state legislatures didn't increase their personal income taxes," says Harley Duncan, executive director of the Federation of Tax Administrators, an association of state revenue departments based in Washington. "The simple facts are that people are probably paying more this year in absolute dollars, but that's because their incomes went up. They're better off and that's a good thing for them and the states."

In past recessions, such as the 1991-92 downturn, states coped with the loss of revenue several ways: They cut spending, dipped into rainy day funds, and raised taxes. In the early '90s, for instance, they hiked taxes an average of 5.4 percent a year, according to Arturo Perez, a fiscal analyst at the National Conference of State Legislatures in Denver.

In the most recent downturn, states also cut spending and used up rainy day funds, but they held the line more on taxes: They raised them an average of only 1.7 percent a year.

"To us, that's evidence that broad-based tax increases have fallen out of favor among legislators and the voters who they represent," says Mr. Perez.

Still, state residents were hardly spared from having to open their checkbooks at all. One favorite way to deal with tight budgets, other than raising income taxes, was to increase fees - and dozens of states did.

Massachusetts Gov. Mitt Romney (R), for instance, liked to proclaim that he wasn't going to raise taxes. And he didn't. Instead, the state put together a $500 million package of fee increases. So now it costs more to register a car, get a fishing license, and or go to community college.

Perhaps even more painful, many cities and towns had to substantially raise property taxes to offset reductions in state aid.

In Wakefield, Mass., for instance, homeowners saw their property taxes go up several hundred dollars. "That's big," says one local homeowner. "It doesn't go down."

"In some cases, what's going on is just cost-shifting to the local level," says Nicholas Jenny, an analyst at the Rockefeller Institute of Government, the public policy research arm of the State University of New York in Albany.

States have employed other strategies as well to increase cash flows without raising income taxes. This has included everything from tax-amnesty programs (to help collect delinquent taxes) to outright borrowing.

SOME, too, have tried to more aggressively collect sales taxes on Internet and catalogue purchases. States lose an estimated $15 million a year in sales taxes that don't get collected because out-of-state online firms aren't required to collect them.

For the first time, some states like Kansas are adding lines to their tax forms that ask whether people have bought anything online or in a catalogue, and, if so, whether they paid state taxes on the purchases. If not, they're expected to.

Smokers in Connecticut, for instance, who buy cigarettes on the Internet thinking they're getting a deal may be in for a surprise. This week the state's Department of Revenue Services announced that it was sending 141 residents tax bills worth a total off $165,000 for unpaid state sales taxes on cigarettes. It's also assessing penalties and interest for nonpayment.