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 www.calculatedriskblog.com  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 www.rockinst.org  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.  www.gjsentinal.com   Republican Minority Leaders Josh Penry predicted that the new FY 2010 budget would only be in balance for 45 days (based on May 6^th 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 4^th, 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: http://www.retirementliving.com/RLtaxes.html

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. www.jasperwelch.org  

A New Era of Fiscal Irresponsibility

A New Era of Fiscal Irresponsibility

Since regaining control of Congress, the Democrats with the help of the newly elected spend & tax President, have been on a spending spree never seen before in America.    The USA triple A bond rating is in jeopardy, as rating agencies are beginning to question the financial viability of the USA government,  with looming debt and unfunded entitlement programs.   While former Congresses and former Presidents are convenient targets to blame, the Democrats in Congress shoulder the responsibility for this current fiscal irresponsibility.    For a graphic view of the problem, here is a web site that gives a visual of just how much trouble the US is in, given the misguided spend & tax approach the Democrats, with the signature support of President Obama have gotten us into: www.gop.gov/accountability

For some specifics on US government waste and lack of accountability, check out Citizens Against Government Waste  www.cagw.org   See the recent 2009 Congressional Pig Book, where over 10,000 Congressional earmarks are detailed, including the newer stealth earmarks, designed to circumvent taxpayer scrutiny.

In addition to the Federal government budget having problems, many of states are in dire financial straights.   But they cannot borrow like the Federal government (probably a good thing) and must balance their budgets.  For more detail on metrics for each state in the US, the US Census Bureau has some good statistics: www.census.gov/compendia/statab/rankings.html

According to the Center on Budget and Policy Priorities  www.cbpp.org the budget crises for state governments continues to worsen in 2009, but unlike the Federal government, they cannot borrow money to cover deficits.  

Here is an insight from the Center: “ The vast majority of states cannot run a deficit or borrow to cover their operating expenditures. As a result, states have three primary actions they can take during a fiscal crisis: they can draw down available reserves, they can cut expenditures, or they can raise taxes. States already have begun drawing down reserves; the remaining reserves are not sufficient to allow states to weather a significant downturn or recession. The other alternatives — spending cuts and tax increases — can further slow a state’s economy during a downturn and contribute to the further slowing of the national economy, as well.”

The overview from the Center continues: “States are currently at the mid-point of fiscal year 2009 — which started July 1 in most states — and are in the process of preparing their budgets for the next year. Over half the states had already cut spending, used reserves, or raised revenues in order to adopt a balanced budget for the current fiscal year — which started July 1 in most states. Now, their budgets have fallen out of balance again. New gaps of $59 billion (some 9 percent of state budgets) have opened up in the budgets of at least 42 states plus the District of Columbia. These budget gaps are in addition to the $48 billion shortfalls that these and other states faced as they adopted their budgets for the current fiscal year, bringing total gaps for the year to 16 percent of budgets.”

According to recent Gallup poll, states such as Wyoming and Louisiana are in the best shape (energy related economies) whereas the higher tax states, those with housing bubbles and those related to financial markets (New York, New Jersey, California, Arizona) are in the worst shape.  www.gallup.com

But some states are doing much better, during this economic downtown, according to Gallup polling and research. “In addition to South Dakota and the four oil-producing states mentioned above, other "best job market" states include oil states like North Dakota, those benefiting from coal like West Virginia, and farm states with comparatively good economies from ethanol and a strong commodities market like Nebraska. Financial-crisis states in the Northeast, including Rhode Island, Delaware, Vermont, New Jersey, Connecticut, and Maine are some of the "worst job market" states, as is the housing crash state of California.

The second quartile of "better job market" states includes those with comparatively better economies because they are also energy-related, like Alaska, and farm-related, like Kansas. Similarly, the second-worst quintile of "poor job market" states have economies damaged by the financial debacle, like New York; the manufacturing depression, like Ohio; and the housing disaster, like Arizona.”

For the higher income tax individuals, states like New York, Minnesota, New Jersey and California are raising taxes from 5% and 6% to rates at the 8% to 10% level.   Combined with the new Obama ‘tax the rich plan’ to raise individual income taxes to 39%, high-income earner is looking at a 50% tax rate!   The assumption from the “tax the rich” camp is that higher income earners will just stay put and be a bigger tax target.   But there are nine states that may have the welcome mat that these higher income producers may want to step across to and end up with lower taxes.

So what states don’t have a state income tax:  Alaska, New Hampshire, Tennessee, Florida, South Dakota, Washington, Nevada, Texas and Wyoming.  www.irs.gov   You may want to look at moving and/or retiring in one of these nine “no income tax” states as the California and New York type of high tax states look at raising the state income tax rates to the 10% level (or approaching the 50% combined Federal + state rate for the high tax states).

© 2009, Jasper Welch, Four Corners Media, www.jasperwelch.org