In red, states seek tax hikes
Budget shortfalls are pushing many states to raise taxes in a recession.
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As the legislature convenes this week, it will examine the governor’s proposal for $14.3 billion in tax increases in addition to $17.4 billion in spending cuts over the next 18 months.Skip to next paragraph
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The state is attempting to close a projected $41.5 billion shortfall.
Mr. Schwarzenegger has already signed an executive order forcing 235,000 state workers to take two furlough days a month starting Feb. 1 and required a 10 percent cut for state agencies, which could lead to thousands of layoffs.
There is also talk of reinstating a notorious car registration fee that Schwarzenegger ended with great fanfare five years ago by staging the dropping of a giant wrecking ball on a rusting old car, and declaring, “Hasta la vista, baby!”
Democrats hold majorities in both houses of the California legislature and have moved closer to Schwarzenegger’s position than Republicans. Nevertheless, the governor vetoed Tuesday a Democratic budget plan that fell short of meeting his demands on spending cuts.
California is one of only three states that requires a two-thirds legislative majority to pass a budget, which is why the state is often extremely late in doing so. When Schwarzenegger signed the most recent budget in September, it was 85 days after the fiscal year began, a record in state tardiness.
Worse before it gets better
Most states are reining in their budget projections for 2010 and anticipating still more cuts.
In New York, another state awash in red ink, Gov. David Patterson proposed 137 new or increased taxes and fees, including an obesity tax, and $9 billion worth of spending cuts in the coming fiscal year.
Reaction to a proposed 18 percent obesity tax ranged from high praise to ridicule: New York Times columnist Nicholas Kristof calling it a “miracle tax diet” to rival the health benefits of not smoking, while the tabloid New York Post labelled it “Tax Hell.”
Meanwhile, Florida, trying to close a $2.3 billion gap in its $66 billion budget, this week is considering raising cigarette taxes. Increasing the tax by between $1 to $1.34 a pack will pull in $700 million annually for the state treasury.
By spring, legislators may also reconsider many of the exemptions they have given that now apply to dozens of goods and services, from accountants to ostrich farmers and charter boat fishing captains.
Like most states, Florida’s fiscal situation is expected to continue to deteriorate. Florida leads the nation in job losses and is among the worst hit by mortgage foreclosures. It has had to cut measures that were supposed to slow those problems – such as a small-business loan program and expanded tax credits for firms that create Florida jobs.
As on the national level, economists expect the fiscal situation for states is likely to get worse before it gets better.
Obama’s stimulus package may stave off further state tax increases, says Mr. Boyd, the fiscal analyst, since outright fiscal relief makes raising taxes harder to justify. Obama’s cuts may be close to 40 percent of a possible $775 billion bill.
But the potential for more tax hikes won’t go away, adds Boyd. And after constituencies see what spending cuts do, they might be more amenable to them.