Will your state taxes go up? How legislatures are leaning.
As red states get redder and blue states bluer, state taxes could head in opposite directions. Some states are trying to eliminate income taxes, others are raising them.
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For example, in Massachusetts Governor Patrick’s plan calls for increasing the income tax from 5.25 percent to 6.25 percent and cutting the sales tax from 6.25 percent to 4.5 percent, which would raise taxes on 50 percent of residents starting January 2014, if approved by the Democratic-controlled legislature.Skip to next paragraph
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“Patrick is going to pay for the investments by increasing revenues,” says Mr. Johnson. “To me that’s basic fiscal responsibility.”
State economies are still fragile and “now is not the time to go blowing a hole in revenue systems,” he adds.
On average, one-third of state revenues come from income taxes, according to the National Conference of State Legislatures. The nine states that don’t have income taxes have higher sales or property taxes. Ms. Rueben says a pragmatic approach is for states to diversify their tax bases, pulling from multiple sources at lower rates in order to reduce negative impacts from a still recovering economy.
“Pressure on state budgets is going to increase,” says Rueben. Public-sector pensions and increased health-care costs from an aging population will expand states’ financial obligations, and it is important for states to be economically flexible.
In some cases, those fiscal realities might prove more persuasive than partisanship. “The difference [from Congress] is that states have to get things done,” says Tim Storey, an election analyst for the National Conference of State Legislatures. “They can’t borrow money, so they have to pass balanced budgets. They have to constantly pass policies on big programs close to people – health care, education, and criminal justice.”
In other words, even with the supermajorities in state government, there is no guarantee that the diverging tax-reform proposals will pass.
“There is a clear tone that it’s time to stop the intense partisan bickering,” says Mr. Storey. “And this comes from leaders in both parties.”
Bipartisanship is needed to address three structural flaws in states’ tax codes, says Mr. CanagaRetna: sales taxes do not cover a majority of services, states cannot collect taxes on Internet purchases, and codes contain a huge number of exemptions supported by special interest groups.
“The tax-reform policies we are seeing now are efforts that are just nibbling at the edges of corroding state revenues,” he says.
He compares the situation to a leaky roof that needs to be replaced. Instead, lawmakers are running around with pots and pans trying to collect the water. “There are no resources to fix the roof, which is what is most needed.”
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