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Tuesday, June 23, 2009

States Face Fiscal Reality

States Face Fiscal Reality

California's income tax is the most progressive of all 50 states, with the second highest top rate (10.55%) after New York City's 12.62%. The Governor's revenue office calculates that between 50% and 55% of the income tax in the state comes from Kobe Bryant and the rest of the richest 1% of taxpayers.

This sounds like a liberal's tax paradise, but the "soak the rich" system has imploded on itself. As tax rates keep rising, more Californians move to places like Nevada and Texas where they can pay zero income tax, leaving Sacramento with fewer revenue sources. Moreover, the progressive rate structure means that California experiences more extreme gyrations in its revenues than any other state.

According to the finance & economics blog CalculatedRisk  data from the Nelson Rockerfeller Institute of Government indicated that state government income tax collections for the first 4 months of 2009 is down by 26% as compared to 2008.    At the NR Institute site  you can click through to the full report on state income tax collections.  Some highlights of the “Change in Personal Income Tax FY 2008 compared FY 2009” :    The largest drop in Personal Income Tax (PIT) collections is Arizona at -54.9%.     States with Personal Income Tax (PIT) that is more than 45% of the state tax base:  New York (down 31.8%), California (down 33.8%), Massachusetts (down 28.5%), Oregon (down 27.0%), Connecticut (down 25.9%), Colorado (down 25.4%), Virginia (down 17%), and Georgia (down 20.9%).    According to the NR Institute, estimated tax payments (first quarter 2009) were down by 30.4% (January through April), and these estimated tax payments were down by 41% in April 2009 (as compared to 2008).   Arizona, Colorado, Indiana and New York had drops of 37% or more (comparing Jan to April 2009 to 2008 period).  

According to a recent report by the National Conference of State Legislatures, “In comparing personal income tax collections through April 2009 to the latest estimate, more than half the states were below target.”3 This is particularly bad news for the states that rely most heavily on personal income tax. A number of states already have enacted or recommended increases in personal income tax rates and other revenue-raising steps such as reductions in tax credits. Such proposals would increase personal income tax collections by more than $7 billion in two states alone: $4.7 billion in California and $2.9 billion in Illinois. 

So just how bad are the revenue shortfalls?    Let’s look at Colorado, whose new budget year begins on July 1, 2009: The forecast, released Monday, showed the state with a budget deficit of $249 million for fiscal 2009, which ends June 30. State officials will need to borrow that much from the 2009-1010 budget, which will push the fiscal 2010 deficit to $384 million, according to the state forecast.   Republican Minority Leaders Josh Penry predicted that the new FY 2010 budget would only be in balance for 45 days (based on May 6th legislative session ending, until the new budget year begins).   The Democrat majority legislature in Colorado passed new taxes on hospitials (provider fee), transporations (vehicle registration) and revoked a seniors property tax exemption.    But these tax increases will not be able to balance the Colorado budget.   Only budget cuts will balance the budget.

In Arizona, the FY 2010 budget shortfall is estimated at $4 Billion, with the Democrat Governor’s office presently in at an impasse with the Republican controlled legislature over the FY 2010 budget.     The GOP passed a FY 2010 budget on June 4th, but has delayed sending it to the Governor, who  has said she’d veto it (and ask the voters to raise taxes).    With the Governor asking the Arizona Supreme Court to intervene, the state may shut down state offices on next week, due to no budget for the next Fiscal Year.

How is your state doing?    For a review of various states and their tax rates (personal income, property, sales tax, etc), the Retirement Living Information Center has a good summary plus “state by state” information:

In the meantime, the fiscal reality of an economic downturn is hitting the state governments (and local governments) hard.  About the only answer left is to cut spending and programs, as raising taxes (which a number of states have enacted or will try to enact) may just contribute to additional taxpayers moving to more favorable states. You may want to consider Wyoming:   No personal income tax, fuel taxes on 14 per gallon (New York is 42 cents!), a 1% sales tax and low property taxes.

© 2009, Jasper Welch, Four Corners Media.