States Gripped by Tax Cut Mania

As governors and legislators throughout the country reap the benefits of economic good times, record state budget surpluses and rosy state revenue projections are encouraging a tax-cutting spree.

A Stateline survey indicates state governments will enact net tax reductions for an unprecedented sixth year in a row, building on a combined tax reduction in the 50 states of $7 billion in Fiscal 1999. In contrast, states had net tax reductions only twice in the previous decade, according to Stacey Mazer of the National Association of State Budget Officers.

At the end of Fiscal 1998, the aggregate budget surplus of the states was $28.6 billion dollars. While tax cut proposals range from reducing corporate and bank franchise taxes in Hawaii to agriculture tax rebates in Texas, a popular target in many states has been the sales tax.

Kansas legislators have rallied around a plan that would virtually eliminate the state sales tax on groceries. Currently one of sixteen states that tax groceries, and with the seventh-highest tax rate in the nation, Kansas is close to approving a plan that would lower the 4.9% tax by one cent each year for the next four years.

“It’s a little like a cancer,” State Representative Cliff Franklin said, referring to the grocery tax. “It nickels and dimes you here and there and it hits the poor and middle-class the hardest.”

Also considering eliminating or reducing sales taxes are Tennessee, Florida, Virginia, Montana, Minnesota, and Texas, among others.

Tennessee governor Don Sundquist (R) announced in his State of the State speech his intention to completely eliminate the grocery sales tax, precipitating talk of the need for a special legislative session.

“Repealing the sales tax on grocery food will mean tax relief for every single Tennessee household,” Sundquist said in his February 8 speech. “For an average family of four, it means annual savings of almost $500. It is achievable now, as part of the Tax Relief and Fairness Act.”

Sundquist’s Tax Relief and Fairness Act caught some Tennessee lawmakers off guard, including House Speaker Jimmy Naifeh. Naifeh and Sundquist have met and discussed the possibility of a three-week special session to act on the tax proposals.

“If the governor’s plan encounters some unforeseen difficulties, we would have to start up the budget process again because the budget is based on this proposal,” Naifeh told the Nashville Tennessean. A partial summary of what other states are doing on the tax-cutting front:

–Delaware’s Democratic Gov. Thomas Carper proposes cutting income taxes in every bracket, increasing deductions for married couples and reducing gross receipts taxes on manufacturers. Republicans want to eliminate the property tax instead. If any of the proposals are approved, it would mark the fifth year in a row Delaware has reduced taxes.

–Wisconsin’s Republican Gov. Tommy Thompson wants to cut business taxes by over $50 million a year to lure more industry to his state. Under his proposal, a company’s taxes would be based only on in-state sales. Companies in Wisconsin are currently taxed on a formula including value of company property, payroll amounts, and total sales.

–Michigan residents are set to receive their 25th, 26th, 27th, 28th, and 29th tax cuts of Gov. John Engler’s Republican administration, as the State Senate last week passed a package of bills to gradually slash the income tax rate to 3.9% by the year 2004. Senate Democrats are also trying to increase the personal exemption from $2,800 to $6,400, which would be the highest in the nation.

–Georgia governor Roy Barnes (D) has proposed a property tax cut totaling $83 million this year and an estimated $2.8 billion over the next eight years. The plan calls for raising the standard $2,000 homestead exemption to $4,000 this year and $20,000 by the eighth year of the plan. Barnes’ plan would also eventually wipe out all property taxes for homes valued under $50,000.

–The Iowa Senate’s Republican majority has offered a counter-proposal to Democratic Gov. Tom Vilsak’s tax cut plans, touting $130 million in income and property tax credits. Vilsak prefers a scaled back plan of income and property taxes in order to increase state coverage of mental health programs from 50 to 90% over the next five years. Tax policy analysts warn that while the present economic outlook makes tax cuts economically viable and politically popular, cutting too much too soon could create problems.

“States need to take some serious consideration into effect when cutting taxes,” said Harley Duncan, Executive Director of the Federation of Tax Administrators, an association representing the principal state revenue collection agencies. “Have they really thought about how their tax structures match the economy and are their projections reliable?”

Hal Hovey, Editor of State Budget & Tax News and a former state finance and budget director, warns state officials not to overlook the possibility of overspending.

“If you are interested in either tax cuts or spending, the time to do whatever you’re going to get done is sooner and not later,” Hovey said. “You may be able to squeeze it in this year, but think about long term solutions to these problems.”

Rhode Island, still smarting from overspending in the 1980s that led to debt in the early 1990s, is heeding advice to proceed cautiously. State budget officials say that the projected $75 million surplus may not be enough to pay for all the promises made in the past two years.

Steven McAllister, Governor Lincoln Almond’s chief budget officer, warns of a $156 million structural shortfall in the Year 2000 budget, exacerbated by state promises to fund a new University of Rhode Island basketball arena and start a major new child-care initiative.

“People are very much surprised at how much of a shortfall that we are looking at,” McAllister said. “Some people have said, We don’t believe you.’ I challenge them: once the budget is submitted, they can come in and audit the figures.”