States Face Growing Budget Gaps, Half Eyeing Tax Increases

By Catherine Hubbard, CCH Washington Staff Writer

State budget gaps have grown by 50 percent in the last two months as states continue to face revenue shortfalls, according to a report released on February 4, 2003 by the National Conference of State Legislatures. "Revenue growth continues to be sluggish," said Oklahoma Sen. Angela Monson at a Washington, D.C. press conference.

State fiscal officers from about 30 states told NCSL for the February budget update that revenue collections are below budget forecasts, with 12 reporting collections below revised estimates. Twenty-four states report that either the governor or a member of the legislature has offered tax increase proposals. However, some officers said it is too soon to know whether their states will consider tax increases.

Like last year, many states are considering raising taxes on cigarettes and tobacco. At least 14 states plan to consider higher cigarette levies and six states plan to look at higher taxes on alcohol. Six state officers said a sales tax rate increase or base expansion is possible, while four said increases in the personal income tax are under consideration.

NCSL's fiscal report is based on information collected from legislative fiscal directors in late January 2003. It covers the revenue and expenditure situation midway through fiscal 2003 for most states. Forty-six states began their fiscal year on July 1. The four exceptions are New York (April 1), Texas (Sept. 1), and Alabama and Michigan (Oct. 1).

The following list includes most of the states that are considering tax increases:

• Alaska -- The Legislature has one bill addressing taxation of wine producers.
• Arizona -- The governor has proposed a premium tax for health plans that contract with the state's Medicaid system, as well as a suspension of the statute that requires a reduction in a homeowners' property tax rate to offset assessed value growth.
• Arkansas -- The governor has proposed a 5/8-cent sales tax increase.
• California -- Proposals would affect the personal income tax (with the imposition of two new tax brackets for high-income individuals), the sales and use tax (1 percent rate increase) and the cigarette tax ($1.12 per pack increase).
• Georgia -- The governor's fiscal 2003 and fiscal 2004 recommendation includes an increase in the excise tax on alcohol and tobacco with a four-year sunset provision. The governor's fiscal 2004 recommendation includes a decrease in the homestead exemption (from $10,000 to $4,000).
• Idaho -- The governor has proposed a sales tax increase from 5 to 6.5 percent and a cigarette tax increase from 28 cents per pack to 62 cents per pack.
• Illinois -- Personal income tax increase and sales taxes on services are under discussion.
• Iowa -- A cigarette tax increase is possible.
• Kentucky -- The governor has publicly discussed increasing the cigarette tax and increasing taxes paid by businesses.
• Missouri -- Tax increase proposals include an income tax surcharge for high-income earners, a cigarette tax increase, gaming tax increases and closing several tax loopholes.
• Montana -- Increases in cigarette and tobacco, beer, wine, liquor, video gaming, rental car, accommodations, sales and selective sales, energy and an income surtax are under discussion.
• Nebraska -- The governor has recommended continuation of prior cigarette tax increase enacted in 2002, plus an additional 20 cents per pack starting July 1, 2003. A wide variety of other tax legislation has been introduced.
• Nevada -- The governor has proposed increasing taxes effective April 1, 2003 (cigarette, liquor, secretary of state fees, restricted slot machines, and business license tax) that would generate an estimated $84.8 million in fiscal 2002-03.
• New Hampshire -- The governor also has recommended increasing taxes by $438.2 million in fiscal 2004 and $560.1 million in fiscal 2005. The tax package includes a 70-cent increase in the cigarette tax (to $1.05 per pack); an 89 percent increase in all liquor taxes; an increase from $100 per year to $300 per year in the amount charged businesses (which is assessed based on the number of FTE employees); a 50 percent increase in all fees charged by the secretary of state (mainly incorporation fees); an increase in quarterly rates charged on restricted slot machines; a new 7.3 percent tax on admissions to amusement-related activities; and an increase in the property tax (for state use) of 15 cents in fiscal 2005. The governor is also recommending the implementation of a gross receipts tax of 0.25 percent with an exemption of $450,000 per business beginning July 2005. Under the governor's proposal, the business license tax would be reduced to $140 per FTE employee once the gross receipts tax is imposed.
• New Jersey -- Possibilities include higher marginal income tax rates on high-income taxpayers and a hotel/motel/lodging room occupancy tax (shared between towns and state).
• New Mexico -- Proposals include lifting the earmarking on the tobacco permanent fund and removing the insurance premium tax exemption for governmental entities.
• New York -- The governor's budget proposal includes a $1.4 billion revenue package, of which $363 million would be generated from tax changes, such as eliminating the sales tax exemption for clothing, and the remainder from various fees and surcharges.
• North Carolina -- The governor reportedly plans to ask that the 2001 sales tax increase (0.5 percent) be extended past the July 1, 2003 sunset date.
• North Dakota -- Cigarette tax is under discussion.
• Ohio -- Cigarette, alcohol and motor fuel taxes are under discussion.
• South Carolina -- A tobacco tax increase has been recommended.
• South Dakota -- Some members of the Legislature are proposing increasing the tax on cigarettes from 33 cents to $1 per pack. Others want to increase the alcohol beverage tax by a nickel per drink. The governor has proposed increasing the cigarette tax from 33 cents to 63 cents and raising the tax on other tobacco products by 10 percent. He has also proposed increasing the alcohol beverage tax and increasing some filing fees.
• West Virginia -- A proposal is pending to increase the cigarette tax from 17 cents per pack to 55 cents per pack.

Related items:

Analysis of Bush's 2003 Tax Cut Proposal

New Year Rings in New Tax Laws

It's Not Too Late To Lower Your Taxes for This Year and Next

Posted February 4, 2003.