Intro
The economic climate over the last couple of years has not been
friendly to state budgets. Prior to September 11, 2001, as a result
of the recession, several states already faced budget deficits and,
since 9/11, those deficits have grown and have been more widely
felt. In short:
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Prior to September 11, 2001, nineteen
states reduced their enacted budgets by a total of about $1.9
billion in order to compensate for revenue deficits.
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Since 9/11, an additional sixteen
states have made cuts to FY02 enacted budgets, or have been faced
with cutting FY03 budgets, in addition to other measures, to close
deficits.
The seriousness of this news,
however, is tempered by the fact that 47 out of 50 states averaged
greater than 4 percent increases in spending from FY99-01. And most
states, presumably with this realization in mind, have made budget
cuts their main policy for deficit reduction. In many cases, of
course, budget cuts alone have not produced the necessary savings
and, as a result, a number of states have enacted tax increases of
various kinds. Specifically:
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Thirteen out of 42 states with budget
deficits chose to address their deficits at least in part through
tax increases.
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Eight of those thirteen have chosen
to impose income tax increases (personal and/or corporate) in
additional to sales taxes and/or user fees, and two more states are
proposing such increases.
While both income and consumption-type
(i.e. sales) taxes do raise revenue, they have very different
economic effects. While sales taxes dampen short-term consumer
demand, they will not discourage savings and investment since they
don't tax interest or dividend income or capital gains. Income
taxes will not only discourage consumption (as people have less
money), they will also discourage savings and investment. This is
important from the consumer end in that people will buy fewer
stocks and put less money in taxable savings accounts (i.e. IRA's),
and more important from the business end in that businesses will
not invest in new plant and products (or jobs). Furthermore, the
economic growth that would result from keeping taxes low, or
reducing them, would in fact increase the tax base such that tax
revenues actually increase, thereby reducing deficits. Thus, state
income tax increases will most likely prove an inhibitor to
economic recovery and growth. Those states that have imposed only
consumption and use taxes will most likely have faster recoveries.
Interestingly, 28 states have either not changed taxes or have
reduced taxes.
Ethan Baker is a former research
assistant in the Center for Data Analysis.
The Fiscal Survey of States: December 2001, (),
The National Association of State Budget Officers (NASBO), December
2001.
State Budgets--Updates (),
NASBO, January 2002.
2000 State Expenditure Report , table 1,
'Total State Expenditures- Capital Inclusive' FY99-01, NASBO,
Summer 2001.
State Budgets--Updates (),
NASBO, January 2002.
Kotlikoff, Laurence J., "Saving and Consumption Taxation: The
Federal Retail Sales Tax Example" in Frontiers of Tax Reform,
Michael J. Boskin, ed., Hoover Institution Press, Stanford, CA,
1996.
Bartlett, Bruce, "Why Tax Cuts are Needed," Detroit News, April 3,
1995 ()