Stateline Story

States Raising Taxes To Fight Deficits

  • July 25, 2002
  • By Jason White

State lawmakers beset by ever-increasing budget deficits are starting to turn to tax and fee increases to close those gaps.

"There was a net tax increase last year. And if you look at the states that have most recently been in session and are acting, they are beginning to look at the tax structure in some way or another," said Bill Pound, executive director of the National Conference of State Legislatures.

Pound delivered this statement at a press conference announcing a new NCSL report State Budget and Tax Actions 2002 at the organization's annual meeting in Denver, Colorado.

At least 16 states raised taxes to close budget gaps and another 10 raised fees, according to the report. The total value of last year's tax increases is $6.7 billion, making fiscal year 2002 the first since fiscal year 1994 to see a net tax increase.

The report indicates that the year ahead could be even rougher for many states. Reserve funds stand at one-third their previous highs and budget forecasts predict an aggregate deficit of $57.9 billion, far larger than what states faced this year. And this figure could grow even bigger if the economy doesn't pick up soon.

"What has been occurring is a scenario that is far from rosy. If anything it borders on being gloomy," said Saland.

On the spending side, some states are applying their paring knives to the one program most lawmakers consider untouchable K-12 education.

"The mere fact that any state would cut education tells you the enormity of the challenge, because, generally, education funding is sacrosanct. It's one of the last things that anybody would want to look at for purposes of cutting," New York State Sen. Stephen Saland, president of NCSL, said at the press conference.

Twelve states cut K-12 education spending last fiscal year and another 11 states cut it this year, according to the report.

The only states not experiencing major revenue problems are those with a significant oil and gas industry.

"One of the things that's been apparent through the year in several of the states that have not experienced a revenue shortfall. . .there is a common denominator that reflects a natural resource economy, and in particular, I think, oil and gas," said Pound.

"If you look at Wyoming, Montana, Texas, West Virginia, through there, that has remained healthy," he said.

Pound placed the blame for most state budget problems on the faltering economy and rising Medicaid costs. But he also pointed a finger at Congress and the Bush Administration, saying the federal estate tax cut and the business investment tax cut exacerbated state budget problems.

Pound said state legislators would like the federal government to increase its share of special education funding and enact a temporary increase in its share of Medicaid funding.

Asked whether state lawmakers and their record tax cuts of the 1990's could be responsible for the states' current revenue shortfalls, New York's Saland protested strongly, laying the blame instead on the economic changes wrought by Sept. 11.

"To say that this reflects a problem that was caused by tax cuts I think is a gross oversimplification. It doesn't do justice to the enormity of the problem. The problem was not merely the cooling economy. The problem was the aftermath of Sept. 11, which knocked the wind out of many people both at a personal level but also at a financial level. Nobody had the ability to foresee that," he said.