Coffer Crisis: State Tax Hikes Loom Larger as Congress Fiddles

Posted on September 30, 2002 | Type: In the News | Author: Jim McTague
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The cost of rousing the U.S. economy from its near-coma could escalate dramatically if the slow-motion trauma team in Congress foot-drags until next year.

A worst-case scenario sees revenue-strapped states and local governments dramatically increasing their taxes by as much as $50 billion to offset budget shortfalls. Any Federal stimulus package of tax cuts or other programs would have to exceed this amount to have any impact. In other words, a Bush-style tax rebate of $36 billion, which helped keep the economy from collapsing last year, would have little, if any, effect in the face of big hikes in sales taxes, licensing fees, business and income taxes.

Currently, there is no stimulus package in the House, where tax bills get started, just plenty of noisy discussion.

Campaigning Republicans are fearful of cutting taxes so close to an election because high-wage-earners pay most of them at the federal level these days; it's unpopular to give such folks extra disposable income during a recession, regardless of the economic arguments.

The phasing-in of President Bush's tax cuts, which would include a repeal of the estate tax, is scheduled to begin in 2004, which may be too late to do the stubbornly semi-conscious economy much good.

In any case, these cuts might not materialize at all. Democrats have pledged to do away with them in the event that their party recaptures the House and retains control of the Senate -- an outcome for which pollsters give long but not impossible odds. Both Maryland Democratic Senator Paul Sarbanes and Rhode Island Democratic Sen. Jack Reed told Barron's last week that targeted tax cuts for investment make more sense to them than the elimination of estate taxes.

So far, most states have resisted raising taxes, even as their aggregate budget gap heads to $57.4 billion for fiscal 2003. Last year, 46 states reported lower-than-expected revenues and spending overruns. In order to balance their fiscal-year 2002-2003 budgets, 18 states increased taxes and 10 hiked fees. Governors in another eight states are seeking tax increases, according the National Taxpayers Union.

The majority of states met their budgets by cutting spending, using tobacco settlement funds, and drawing on surplus funds set aside for a rainy day. At a September meeting, most state budget officers said they would continue to resist raising taxes, says Corina Eckl, fiscal programs director for the National Conference of State Legislatures.

State surpluses are estimated at $13.1 billion at the end of FY 2003 versus $18.4 billion at FY 2002 and $31.50 billion at FY 2001, according to NCSL data. Stephen Moore, president of The Club for Growth, which sends contributions . . . to the most free-market oriented candidates in tight, but winnable races," according to its Web-site, says that projected budget shortfalls probably will turn out to be much larger than many people expect, which means that the surpluses could be drawn down much faster.

Consumers have cut back on retail purchases, which will trim the amount raised by state sales taxes. And many smokers are avoiding higher taxes on cigarettes by purchasing cartons from Indian reservations over the Internet, he says.

The bottom line, as shown by Moore's crystal ball: To deal with their prospective budget shortfalls, 20 to 25 states will have to raise taxes, to the combined tune of $30 billion to $35 billion. Throw in the likely aggressive tax hikes by local governments, and the state-and-local tax boost jumps to $40 billion Moore says.

Eckl considers Moore's figures to be on the high side, owing to what she heard at the September meeting. But she allows that the states may find themselves in more of a bind than they anticipated come January, if the national economy doesn't get off its back.

Stephen Moore and tax expert Stephen Slivinski of the Goldwater Institute last week presented the Cato Institute's sixth biennial fiscal report card on the nation's governors. Cato, the libertarian-leaning public-policy research foundation, awards high grades to governors who cut taxes and spending and failing grades to those who do the opposite. Only two governors received As: Bill Owens of Colorado and Jeb Bush of Florida, both Republicans. But some of Moore's highest praise went to Georgia's Democratic governor, Roy Barnes, who earned a high B. "I wish that your party would nominate you for president," Moore gushed. Moore sees Barnes, who is in his first term, as a rising star in the Democratic Party because he's a Southern fiscal conservative who could attract broad support.

Barnes has cut property taxes in Georgia by $250 million, refused to raise gasoline taxes, cut the state budget by 2.5% and reduced the state capital-gains tax.

Four governors received Fs: Democrats Gray Davis of California and John Kitzhaber of Oregon; and Republicans Bob Taft of Ohio and Don Sundquist of Tennessee.

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