Revised November 25, 2003

State revenues have fallen dramatically
Tax Increases So Far Have Failed to Fill the Gap

By Jennifer Schiess, and Joseph Llobrera

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State tax systems — a major source of funding for public education, health care, public safety, and other services — are producing far less revenue now than they did a few years ago, less revenue than they did at the same point emerging from the last economic slowdown, and less revenue than they have on average since 1970.  Since most states must balance their budgets annually, the result is the largest cuts in state spending in a generation.

The decline in state revenue would have been even worse — and led to even larger state budget cuts — had not a majority of states raised taxes.  Since late 2001, about 30 states have expanded their tax bases or increased tax rates to lessen the decline in revenues.  Such tax increases have been enacted in states with Republican leadership, states with Democratic leadership, and in states with bipartisan leadership.  When fully implemented, these tax increases will raise some $18.4 billion per year that otherwise would have gone uncollected, an amount equal to about 3.4 percent of total state tax collections.

Although significant, the tax increases enacted during this downturn are far fewer and smaller than the tax cuts enacted during the economic expansion of the 1990s.  From 1994 to 2001, some 44 states enacted significant tax cuts.  The revenue loss resulting from those tax cuts was temporarily offset by unusually high revenue resulting from the usual economic boom of the late 1990s — including the rapid rise of the stock market and the increase in personal consumption.  But while those temporary economic conditions have ended, the tax cuts of the 1990s mostly remain in place and are costing states some $40 billion or more per year.  The result is that the current round of state tax increases, on aggregate, is only filling in part of the hole left by the tax cuts of the 1990s.

Recent federal actions also are undermining the positive revenue impact of the state tax increases.  Over the last three years, the federal government has enacted three tax cuts that have cost many states revenue because of the way the federal and state tax codes interact.  Many states have responded by enacting tax-code changes that reduce the revenue loss, but only a very few have entirely avoided it.  States are likely to lose $4.2 billion in revenue in fiscal year 2004 and another $4 billion in revenue in fiscal year 2005 as a result of the federal tax cuts, offsetting as much as one-fifth of the total tax increases enacted by states.

The state tax increases of 2002 and 2003 are — in aggregate — far from sufficient to offset the fiscal pressures states are presently facing.  Nor are they likely to be of enough assistance as states face growing fiscal pressures in the future.  Over the coming years, state budgets will have to cope with rising costs for such services as education and corrections and a rising elderly population that will place increasing burdens on such state-financed services as Medicaid, among other cost pressures.  But because of widely recognized flaws in state tax systems, tax revenues in most states are not expected to keep pace with those costs. These flaws include an inability to fully tax interstate and Internet-based commerce, excessive reliance on stagnant excise-tax revenues, expanded use of tax loopholes by corporations, and relatively flat income taxes that do not grow sufficiently relative to the economy.  With some significant exceptions, the tax increases of 2002 and 2003 do not address these flaws; many are temporary or are increases in slow-growing or even declining revenue sources such as cigarette taxes.

It is not too late for states to begin to fix their troubled revenue systems.  Indeed, several states in the last two years have moved to improve their tax codes in ways that raise (or protect) revenue now and in the future.

 

How Far Have State Tax Burdens Fallen?

In the 12 months ending in June 2001, states collected $557 billion in taxes, according to the U.S. Census Bureau.  Two years later, in the period ending in June 2003 (the latest period for which state tax data are available from Census), states collected $536 billion — a $21.6 billion decline in nominal dollars.

The decline is even more striking when one takes inflation and population growth into account.  With those adjustments, the loss of revenue experienced by states over the last two years has been $56.9 billion — a full 10 percent decline in the annual level of tax collections.

This sharp drop is far more than simply a reversal of the somewhat stronger-than-usual revenue growth of the late 1990s.   The 2001-2003 drop-off did not merely return state taxation to a “normal” or typical level relative to the economy.  Rather, state taxes now have tumbled to levels that are low by historical comparisons.

Tax revenue is likely to stop falling, but so far there is little reason to expect a rebound in the near future that would be strong enough to recoup the lost revenue.   In the most recent quarter for which data are available — the April-June 2003 period, which is the quarter in which states typically receive the most revenue — Census data show that state tax collections in nominal dollars were virtually unchanged (up by less than 1 percent) from the same period the year before.  If one factors out inflation and population growth — not to mention legislated tax changes — the data show clearly that the April-June 2003 period was states’ worst quarter for tax receipts in years, the accumulation of several years of declining receipts.

 

Are States Fixing the Problem?

As bad as they are, state revenue problems would be even worse if many state policymakers over the last two years had failed to raise taxes.  Although taxes are typically the last resort of policymakers, many states have found that spending reductions, reserve-fund drawdowns, federal fiscal relief, bond sales, and other actions have been insufficient to bring budgets into balance.  Consequently, many have raised taxes.

Table 1
State Tax Increases Exceeding Five Percent of Revenues, 2001-2003

 

State

Major tax actions & year of enactment

California

Corporate income tax increase (2002)

Connecticut

Gasoline and cigarette tax increases (2002); increase in personal income tax top rate, corporate income tax surcharge, increase sales taxes on services, others (2003)

Delaware

Increases in corporate fees and taxes, cigarette tax increase, increased state’s share of revenue from slot machines (2003)

Indiana

Sales tax rate increase, cigarette tax increase, gasoline tax increase, increased gambling taxes, utility tax increase (2002)

Kansas

Sales tax rate increase, business tax increase, gasoline tax increase, cigarette tax increase, inheritance tax increase (2002); extended sales tax increase (2003)

Massachusetts

Income tax increases (including capital gains tax increase, personal exemption reduction, and elimination of charitable deduction), cigarette tax increase (2002);  closure of corporate loopholes (2003)

Nebraska

Income tax rate increase, cigarette tax increase, sales tax rate increase and base expansion (2002, extended in 2003)

Nevada

Increases in business taxes, gaming fees, cigarette and alcohol taxes (2003)

New Jersey

Corporate income tax increase, cigarette tax increase (2002), increases in cigarette and hotel taxes (2003)

New York

Increase in cigarette taxes (2002);  increases in top personal income tax rates and sales tax rate, removal of sales tax exemption for clothing, corporate loophole closures, insurance tax increase (2003)

North Carolina

New top rates for personal income tax, increased sales tax, corporate loophole closures (enacted 2001, extended some provisions 2003)

Ohio

Increased cigarette taxes (2002);  sales and gasoline tax rate increases, others (2003)

Oregon

Increased cigarette taxes (2001), personal income tax surcharge and corporate tax increase (2003)

Tennessee

Sales tax rate increase, corporate tax increase, cigarette tax increase, alcohol tax increase (2002)

 

Notes:  For purposes of this analysis, only actual increases (as opposed to postponed tax cuts) are counted.  Vermont enacted a large sales tax increase to offset a reduction in school property taxes; since there was essentially no net tax increase, Vermont is not listed here. 

 

Yet large as those figures are, the recent tax increases remain modest by most standards.

These cuts were permanent.  In other words, annual state tax revenue by 2001 had fallen about 8.2 percent — or more than $40 billion — below what it would have been had those 43 states not cut taxes during that time.[3]  In the great majority of the states now raising taxes to a significant degree, the recent tax increases are lower than the tax cuts of the 1990s.

Even when the economy recovers, there is little reason to expect that state revenues will rebound sufficiently to make up for the revenue decline of the past year.  A long-recognized flaw in state revenue systems is that they tend to erode relative to economic growth.  As the National Governors Association and the National Conference of State Legislatures have reported, the gradual erosion of state revenues occurs largely because of the substantial reliance on sales and excise taxes; items subject to those taxes in most states are declining in the long term as a share of total consumption.

At the same time, state corporate income taxes as a share of corporate profits have steadily declined over several years, partly reflecting corporations’ ability to restructure their finances to avoid state taxes.  State income taxes do the best job of keeping pace with economic growth over the long term, but they typically are not structured to compensate fully for the gradually declining revenue from other tax sources.  As a result, over a period of several years, state tax bases tend to decline as a share of the economy, meaning that — absent such unusual circumstances as existed in the late 1990s — states over the long term must raise taxes or ratchet down spending to keep budgets in balance.

It is possible for states to restructure their taxes to correct these problems.  This is not, however, what they have done.  Indeed, the majority of the tax increases since late 2001 stand to deepen the structural flaws in state tax systems.

On a positive note, a few states have broadened their sales tax bases by adding some services — interstate phone services in South Dakota, cable and satellite television in Utah, and building cleaning and maintenance, security, pest control, automobile washing and painting, computer software training, and installation of taxable items in Nebraska —  that were previously exempt.[4]  Several other states including Alaska, Montana, Nevada, New Jersey and North Dakota created or increased taxes on tourism related activities, such as hotels and car rentals.

Altogether, increases in consumption taxes — general sales, cigarette, alcohol and gasoline taxes — have represented $9.9 billion or 54 percent of the total net tax increases of the last two years.

Recent State Tax Changes Largely Have Increased Regressivity — With Some Exceptions

Economists widely recognize that state and local tax systems are “regressive”; that is, lower-income families pay a greater share of their incomes in taxes than do higher-income families.  This regressivity results largely from states’ substantial reliance on consumption taxes.  Poor families spend larger shares of their income on items subject to tax than higher-income families do, so consumption taxes take larger shares of poor families’ incomes.  Motor vehicle property taxes also appear to be regressive.  State personal income taxes generally are at least somewhat progressive, because some have rate structures that tax higher incomes at higher rates, and most exempt the first several thousand dollars of each family’s income.

In the current period of rising joblessness and poverty, one might imagine that state tax changes would be structured in ways that minimize new burdens on low- and moderate-income families.  But instead, the great majority of the state tax increases since late 2001 — some 54 percent — have been increases in regressive taxes.

The emphasis on boosting regressive taxes is particularly striking in contrast to the nature of the tax cuts enacted in the middle and late 1990s, a period in which states reduced taxes paid predominantly by higher-income households – specifically, personal income taxes, corporate income taxes, and inheritance taxes — far more than they reduced sales taxes and other consumption taxes which are most burdensome for lower-income families.  During that period, states reduced personal income taxes, corporate income taxes, or inheritance or estate taxes by about $28 billion, but cut consumption taxes only by a net $1 billion.

A few states appear to have recognized the distributional consequences of raising consumption taxes.  Recent tax packages in Connecticut, Massachusetts, Nebraska, North Carolina, and New York, for instance, included not only consumption-tax increases that most heavily affect poor families but also increases in personal income taxes that most heavily impact high-income families.  Indiana and Kansas balanced their tax packages in a different way.  They set aside a portion of the revenue from increases in consumption taxes to pay for expanded tax credits for low-income families.  Specifically, Indiana restructured and expanded its Earned Income Tax Credit, and Kansas increased both its state EITC and its sales tax credit.  Those measures will help blunt the disproportionate burden of consumption tax increases on poor families.

Louisiana, in a referendum, went a step further.  The state cut sales taxes on groceries and utilities and raised its income tax, thereby reducing the overall burden of taxes on poorer families and increasing the burden on higher-income families.

Fewer states have raised income taxes than consumption taxes over the last two years.  Personal income tax increases account for $3.4 billion in new revenue — about 18 percent of the total.  Nearly half of that new revenue is in New York, where new top rates were levied on higher-income families. Other states with notable personal income tax increases include Arkansas, Connecticut,  Massachusetts, Nebraska, North Carolina, Ohio, Oklahoma, and Oregon.  (Oklahoma’s increase was triggered by a provision in state law that automatically rolls back a previously implemented reduction in income taxes when state revenues fail to meet specified levels.)

States That Aren’t Raising Taxes May Be Raising Fees

This report follows the conventional definition of “taxes” to exclude such items as public-university tuition, health care copayments, child care parent fees, and other items more appropriately categorized as “user fees.”  Increases in user fees resemble tax hikes, however, in the added economic burden they impose on families.  On the other hand, fee increases are similar to budget cuts in that they fall on specific segments of the population, while many taxes are more broad-based.

According to the National Conference of State Legislatures, at least 30 states in 2003 raised more than 200 different fees for nearly $2.6 billion in new revenue, on top of nearly $1 billion in fee increases enacted in 2002.  These include motor vehicles and drivers’ licenses, and court fees, filing fees, and recreational fees.  The Kaiser Commission on Medicaid and the Uninsured reports that 21 states expect to charge low- and moderate-income families more for their health care in FY2004.

The NCSL figure substantially understates the number of states raising fees and the resulting new revenue, because it primarily counts fees enacted by state legislation.  Many state agencies have latitude to increase fees for services on their own, and many have done so to offset cuts in state general-fund support.  For instance, every state university system has raised tuition and fees, and a survey by the National Association of State Universities and Land Grant Colleges found that public universities in some 34 states raised tuition for the 2003-04 school year by more than 10 percent — often much more — adding billions of dollars in added costs to students and their families nationwide.

These fee increases are particularly striking to the extent that they target low- and moderate-income families, such as those that receive health care and child care assistance, at the same time that middle- and upper-income families continue to benefit from the tax cuts that were enacted the 1990s and that remain in place.

Personal income taxes are the broadest-based state taxes; in other words, they cover the broadest range of economic activity.  For that reason, they tend to grow in tandem with the economy over time.  States would be better prepared to fund services in a stable manner in the   future if they looked to personal income taxes rather than consumption taxes as sources of new revenue.  (Of course, such stable future funding will not be available if those income tax increases are allowed to expire, as will occur in several of those states over the next two or three years.)

A few states are going in the other direction on personal income taxes:  enacting future-year reductions that will undermine, rather than support, the ability of those states to provide services.  Georgia, Montana and New Mexico each enacted personal income tax reductions in 2003 that will have most or all of their fiscal impacts in years after 2004 – in other words, outside of those states’ budgetary windows.  It remains unclear how these tax cuts will be financed if they are, in fact, implemented — for instance, whether these states will need to cut services or raise other taxes in order to keep their budgets in balance.

Are Personal Income Taxes a Sound Revenue Source for States?

State personal income tax revenues generally have declined more in the last two years than have other types of state tax revenue.  Particularly sharp declines in California and Oregon have led to high-profile budget problems, raising the question:  Is high reliance on a state income tax a bad idea?

The answer appears to be no.  State budget problems do not appear to correlate closely with reliance on a personal income tax;  several states without income taxes, such as Tennessee and Washington, have had severe budget crunches, and several states with strong progressive income taxes like New Mexico, Utah and Vermont have fared less poorly.  In part, this is because when both economic downturn and economic expansions are taken into account, personal income taxes grow faster than other taxes.  For instance, data from the Rockefeller Institute of Government show that from 1990 to 2002 — a period including two recessions and one recovery — state personal income tax revenue rose 97 percent (in nominal terms, factoring out legislated changes) while state sales tax revenue rose just 68 percent.  The national economy grew 83 percent in that time.  In other words, even taking into account the recent drop in income tax revenue, income tax revenue has still grown faster since 1990 than sales tax revenue.

Moreover, the recent unstable performance of the personal income tax, especially in states with substantial high-tech sectors like California and Oregon, may have been an anomaly.  Looking over a longer period of time including several economic expansions and downturns, University of Tennessee professor William Fox and colleagues found in a recent study that neither state income taxes nor sales taxes were inherently more volatile than the other.  In other words, shifting reliance from the income tax to the sales tax will not necessarily provide more short-run stability.

A bigger factor in California and Oregon’s budget problems may have been those states’ lack of meaningful rainy-day funds, which most other states have created to soften the blows of revenue downturns.  Had those states placed substantial income tax revenue in such funds in the 1990s instead of (for instance) spending it on new tax cuts, their budget problems in the last two years would have been smaller.

Another $3.7 billion of the tax increases of the last two years — about 20 percent of the total — were increases in corporate income taxes.  About half of this came from a $600 million to $700 million increase in New Jersey and a $1.2 billion increase in California.  The New Jersey action in particular represents an important step toward reforming that state’s corporate income tax, because much of the revenue comes from establishing an alternative tax base that is intended to ensure that more profitable corporations pay New Jersey taxes and thereby stem the long-term decline in corporate income tax revenues; another significant portion of revenue comes from closing loopholes in the corporate tax base.[5]  New Jersey’s corporate income tax increase, therefore, will improve the state’s ability to raise revenue over both the short- and long-term. Other states raising substantial new revenue from corporate taxes since late 2001 include Alabama, Delaware, Illinois, Nevada, North Carolina, Oregon and Tennessee.

Table 2
Estimated State Impact of Selected Federal Tax Changes,
 State Fiscal Years 2003-05 (Dollars in Billions)

 

FY 2003

FY 2004

FY 2005

Total

Bonus depreciation (16 states)

$0.7

$1.6

$0.5

$2.8

Estate Tax (34 states)

1.0

2.0

3.0

6.1

Section 179 (45 states)

-

0.6

0.5

1.1

Total

$1.7

$4.2

$4.0

$10.0

Notes: Bonus depreciation figure assumes that the provision will not be extended beyond December 2004.  See Appendix for state-by state detail.  Numbers may not add due to rounding.

California’s increase is less positive because it is only in effect for tax years 2002 and 2003, and starting in 2004 it actually gives corporations a larger tax break than they now enjoy.  In essence, the California legislation actually gives most of that $1.2 billion back to California corporations beginning in tax year 2004, plus an additional tax cut, and fails to fix any of the problems contributing to long-term decline in the state’s corporate income tax.  But both the California and New Jersey business tax increases have the virtue of avoiding placing disproportionate new tax burdens on low- and moderate-income families.

The relatively modest increases in personal income taxes and corporate taxes enacted by states in 2002 and 2003 stand in sharp contrast with the large cuts in personal income taxes and in other progressive taxes from 1994 to 2001.  The great majority of the tax reductions enacted from 1994 to 2001 — some 81 percent of total tax cuts, totaling some $28 billion in annual lost revenue to 37 states — were reductions in personal income taxes or similarly progressive taxes.  By contrast, just 9 states cut general sales taxes significantly, for a total of only about $3.4 billion.  In addition, several states actually increased sales or excise taxes.  The net reduction in consumption taxes totaled about $1 billion, or less than 4 percent of total tax cuts.

 

A Fifth of State Tax Increases Are Offset by Lost Revenue Due to Federal Tax Cuts

The tax increases enacted by states in the last two years have been undermined by recent federal actions.  As the Appendix to this analysis shows, nearly every state is losing at least a modest amount of revenue — and many are losing a lot of revenue — as a result of the 2001, 2002 and 2003 federal tax cuts.  The reason is that nearly every state’s tax code is linked to the federal code.  When the federal tax code is changed, for instance by altering the calculation of income subject to tax, state tax collections typically are affected.

State policymakers often can avert the loss of revenue by severing those links, or “decoupling.”  But they often are unwilling or unable to do so.  In a few states, state constitutions bar decoupling.  In other cases, states choose to continue to conform to the federal tax code – in spite of the revenue loss -- for administrative reasons; decoupling can make it harder for taxpayers to comply and for states to enforce tax laws.  Decoupling often poses political difficulties as well; policymakers sometimes fear that decoupling could be interpreted as a commentary on the soundness of the federal changes.

Recent federal actions with state revenue implications include the 2001 tax law’s rapid phase-out of a provision in the estate tax which allows taxpayers to claim a full credit for state estate taxes paid;  most states had linked their own estate taxes to this provision.  Another federal action was the so-called “bonus depreciation” rule – enacted in 2002 and expanded in the 2003 law – allowing businesses to claim immediate deductions for certain investment purchases.  A third was a similar provision targeted to smaller businesses in the 2003 law, knows as “Section 179 expensing.”  Other provisions in both the 2001 and 2003 laws also costs states revenue to some degree.

Although many states decoupled from at least one of those federal tax changes, few decoupled from all of them.  The resulting revenue loss to states equals approximately $1.7 billion in fiscal year 2003, $4.2 billion in fiscal year 2004, and $4.0 billion in fiscal year 2005, for a three-year total of $10 billion in state tax cuts that are driven by federal tax actions.

These federally-driven state tax cuts are quite large, representing nearly 1 percent of state tax revenue.  In other words, even as many states are raising certain taxes, they are also allowing federally driven tax cuts to reduce other taxes.  In aggregate, the federally driven tax cuts offset about one-fifth of the state-specific tax increases described in this paper.  In many cases, the taxpayers benefiting from the federally driven changes are not the same ones most affected the state changes.  For instance, a very small percentage of wealthy families are receiving most of the benefits from the estate-tax changes, while most of the state tax increases described in this paper affect lower and middle income families.

For fiscal year 2005 and beyond, the biggest impact on states is the loss of estate tax revenue.  Decoupling from the estate tax is straightforward; 17 states have already done so, and others are likely to consider doing so to avert further revenue loss.

 

How Are Tax Increases Affecting State Economies?

To the extent states have raised taxes over the last two years, the purpose has been to avert even greater spending cuts.  This choice can make sense not only from the perspective of preserving public services, but also from the perspective of accelerating the economic recovery.  Although the economic perils of tax increases are often touted by their opponents, spending cuts could actually be more damaging to the nation’s economy than tax increases.

As Nobel Prize-winning economist Joseph Stiglitz and Peter Orszag of the Brookings Institution have pointed out, a $1 reduction in state public-sector spending typically results in a $1 reduction in a state’s economic activity.  A $1 increase in taxes, by contrast, is likely to result in a smaller reduction in a state’s economic activity, because to some extent the tax increase would be financed out of reduced savings, or from reduced out-of-state consumption.  This is particularly true of tax increases on higher-income individuals, because such individuals are most likely to have access to savings.

Stiglitz and Orszag conclude:

If anything, tax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run. Reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are likely to be more damaging to the economy in the short run than tax increases focused on higher-income families. In any case, in terms of how counter-productive they are, there is no automatic preference for spending reductions rather than tax increases.

The focus of Stiglitz and Orszag’s analysis is the short-run impacts of taxes and spending on state economies.  Economic research into the long-term tradeoff between taxes and public expenditures also suggest public expenditures can contribute as much, if not more, to economic growth as low taxes.  In hundreds of surveys, business executives have placed taxes lower on the list of important location factors than such factors as labor availability, costs and training; access to markets; access to raw materials; transportation costs; public services; and quality of life.  Careful studies of the relationships between taxes, spending, and job growth show that undermining a state’s educational system, its infrastructure, or other services vital to businesses and workers over the long run can do more damage than abandoning tax cuts that are no longer affordable.[6]

State employment statistics show that a no-new-taxes stance cannot guarantee economic recovery.  Several states that avoided tax increases in the 2002 legislative sessions and instead enacted large spending cuts, such as Delaware, Iowa, Kentucky, Michigan, Mississippi, Missouri, and South Carolina, suffered above-average private-sector job loss from July 2002 to July 2003, according to the Bureau of Labor Statistics.  Of course, many tax-raising states also lost jobs, but bear in mind that most of them cut spending, too.  The state with the largest private-sector job loss from July 2002 to July 2003 was South Carolina, a state that has not raised taxes at all but has cut real per-capita general-fund spending over the last two years by 10 percent, more than double the national average.

 

How Can States Raise Taxes for Long-Term Adequacy?

This analysis suggests that states have both a short-term revenue problem and a long-term revenue problem.  The short-term problem is that they must replace some $38 billion in annual tax revenue.  The long-term problem is that if replacement revenues are not well designed, states will continue to lose revenue as a result of structural problems that cause gradual erosion of tax bases.  Several options exist that can address both of these problems.[7]

At the least, states should not enact new tax cuts or continue to implement phased-in tax cuts.  They should follow the lead of states such as Connecticut, Massachusetts, Michigan, and Oregon, all of which in 2002 and/or 2003 postponed at least some planned tax cuts, as several other states did in 2001.  Indeed, such states should consider going one step further and canceling those tax cuts altogether in recognition that those tax cuts were predicated on the unusual, unsustainable revenue growth of the 1990s.

Appendix I
Estimated State Tax Revenue Loss Due to Federal Changes and State Failure to Decouple

 

Which federal tax changes affect

State revenue?

 

 

 

 

 

Total state revenue loss ($millions)

 

Estate tax

Bonus depreciation

Section 179

FY 2003

FY 2004

FY2005

Total

Alabama

yes

yes

yes

$65

$184

$79

$329

Alaska

yes

no

yes

1

4

4

8

Arizona

yes

no

No

19

38

58

115

Arkansas

yes

no

yes

5

16

22

43

California

yes

no

no

387

762

1,105

2,253

Colorado

yes

yes

yes

103

177

90

370

Connecticut

yes

no

yes

8

78

112

198

Delaware

yes

yes

yes

23

91

57

171

Florida

yes

yes

yes

299

736

685

1,720

Georgia

yes

no

yes

27

79

109

216

Hawaii

yes

no

yes

11

19

27

57

Idaho

yes

no

yes

3

8

11

22

Illinois

no

no

yes

0

37

32

69

Indiana

yes

no

yes

4

24

27

56

Iowa

yes

no

yes

8

22

31

60

Kansas

no

yes

yes

59

88

26

173

Kentucky

yes

no

yes

11

34

47

92

Louisiana

yes

yes

yes

64

128

58

250

Maine

no

no

no

0

0

0

0

Maryland

no

no

yes

0

16

14

31

Massachusetts

no

no

yes

0

29

26

55

Michigan

yes

yes

yes

118

188

155

461

Minnesota

no

no

yes

67

176

164

407

Mississippi

yes

no

yes

7

19

27

53

Missouri

yes

yes*

yes

30

228

174

432

Montana

yes

yes

yes

24

39

15

78

Nebraska

no

no

no

0

0

0

0

Nevada

yes

no

no

14

23

34

71

New Hampshire

yes

no

yes

6

17

25

49

New Jersey

no

no

yes

0

28

25

54

New Mexico

yes

yes

yes

49

78

37

164

New York

no

no

yes

0

79

76

156

North Carolina

no

no

yes

0

26

23

49

North Dakota

yes

yes

yes

17

27

11

55

Ohio

no

no

yes

0

30

27

56

Oklahoma

yes

yes*

yes

15

45

27

87

Oregon

no

yes

yes

106

158

46

310

Pennsylvania

no

no

yes

0

29

26

55

Rhode Island

no

no

yes

0

3

2

5

South Carolina

yes

no

yes

16

36

48

100

South Dakota

yes

no

yes

9

9

4

22

Tennessee

yes

no

yes

5

14

19

38

Texas

yes

no

yes

81

175

252

508

Utah

yes

yes

yes

31

75

35

141

Vermont

no

yes*

yes

3

6

3

12

Virginia

no

no

yes

0

22

19

41

Washington

no

no

no

0

0

0

0

West Virginia

yes

yes

yes

40

87

44

171

Wisconsin

no

no

yes

0

18

16

35

Wyoming

yes

no

no

3

5

7

16

District of Columbia

yes

no

yes

8

21

29

57

States total

33

16

44

  $1,678

$4,137

$3,865

$9,679

*Oklahoma and Vermont decoupled from bonus depreciation for purposes of corporate income taxes but not personal income taxes. Missouri decoupled for FY 2003 only.

Sources:  Center on Budget and Policy Priorities estimates based on information from state revenues departments and legislative offices, the Internal Revenue Service, and the Joint Committee on Taxation.


End Notes

[1] Three additional states, Georgia, Michigan, and Rhode Island, also implemented substantial tax increases, but they were offset by tax cuts such that the net annual change in revenue is expected to be less than one percent of revenue.

[2] One rough way of calculating the lost public services is to compare historic levels of spending growth with more recent levels.  In the 1990s — averaging across both the early-1990s recession and the later expansion — real per-capita state expenditures grew slightly below 2 percent annually (incidentally, a lower rate than in previous decades).  Had that growth rate continued over the last three years, state spending would be up by about 6 percent rather than down by 5 percent from 2001 levels, a difference of about $59.5 billion.  For discussion of spending trends, see Elizabeth C. McNichol, Fiscal Crisis Is Shrinking State Budgets, Center on Budget and Policy Priorities, October 2003.

[3] See Nicholas Johnson, The State Tax Cuts of the 1990s, the Current Revenue Crisis, and Implications For State Services, Center on Budget and Policy Priorities, November 2002.  These calculations are based on a detailed review of tax change data collected in annual surveys by the National Conference of State Legislatures since 1990.  In order to come up with a multi-state, multi-year figure, a host of adjustments to the NCSL data were necessary.  These adjustments include accounting for timing shifts, phased-in tax cuts, expiring tax increases, and other items missing from the NCSL survey or otherwise reported in ways that misrepresent the actual impact of tax changes on taxpayer liabilities.  Even without these adjustments, the ongoing impact of the tax cuts of the 1990s clearly exceeds that of the current tax increases; for instance, a recent analysis by the Rockefeller Institute of Government finds that total tax cuts from fiscal year 1996 to fiscal year 2002 totaled $33 billion or about 7 percent of tax revenue.

[4] Connecticut enacted both base-broadening and base-narrowing measures in its sales tax, by taxing health and athletic club memberships but repealing the tax on patient care services.

[5] A portion of that New Jersey revenue, about $200 million, is temporary in nature because it derives from a suspension of a tax deduction for operating losses that is effective only in 2002 and 2003;  corporations may be able to recoup much of that amount in later years.  The remaining $400 million to $500 million is a permanent revenue increase.  These figures exclude an estimated $200 million to $300 million in one-time revenue that the state will gain in fiscal year 2003 only due to timing shifts and to the retroactive implementation of some of the changes.

[6] See for example, Michael Wasylenko, “Taxation and Economic Development:  The State of the Economic Literature,” New England Economic Review, March-April 1997, reprinted in State Tax Notes, June 23, 1997, pp. 1883-95; Robert G. Lynch, Do State and Local Tax Incentives Work?, Economic Policy Institute, Washington, D.C., 1996; Timothy Bartik, Who Benefits From State and Local Economic Development Policies?, W.E. Upjohn Institute for Employment Research, Kalamazoo, Michigan, 1991.

[7] These revenue options are described in a series of Center on Budget and Policy Priorities publications, summarized in State Tax Increases are Necessary to Preserve Basic Services: Background on Options Available to States, /cms/index.cfm?fa=view&id=1908