Stateline Story

States Need Fewer Tax Hikes to Stay in the Black

  • July 20, 2004
  • By Pamela Prah

States' fiscal nightmare of the past four years appears to be ending. Fewer states had to raise taxes and fees in 2004 than last year to balance their books, according to a July 20 report from the National Conference of State Legislatures, a nonpartisan group of legislators meeting in Salt Lake City this week.

NCSL President Marty Stephens (R), speaker of the Utah House, and NCSL Executive Director William Pound said at a news conference in Utah that they have encountered a sense of optimism among legislators about states' economic futures.

Yet even with revenues on the uptick, years of belt tightening mean states now face a pent-up demand for repairs and projects, from capital improvements to building and road maintenance, plus demands for more services, particularly in education and health care. Some state budgets are being re-balanced at levels lower than four years ago, officials said.

"So many things have been put aside," said Arturo Perez, a fiscal analyst with NCSL. "There's still a lot of catching up to do."

Overall, states in 2004 hiked taxes $2.8 billion, significantly less than the $8.8 billion net tax increase in 2003. But final figures aren't in yet from six states, including giants California and New York, which are without new budgets for fiscal 2005.

Thirty-two states managed to avoid major tax hikes for fiscal 2005, which began July 1 for most states, and only three states saw their revenues decline as a rebounding U.S. economy boosted most states' coffers, NCSL said in its 12-page report.

The report looks at how states closed an $84 billion budget gap in fiscal 2004 and contains budget projections for fiscal 2005.

For the 44 states that provided NCSL data, revenues were 5.4 percent above fiscal 2003 levels. Only three states Alabama, Oregon and South Dakota reported revenue declines. Eighteen states ended fiscal 2004 with a balance exceeding 5 percent, the level Wall Street analysts recommend, NCSL said.

Six states California, Illinois, Kentucky, Michigan, New York and North Carolina -- had not nailed down final budgets for fiscal 2005 when NCSL wrote the report. These six states account for about a third of total state budgets, NCSL said. Michigan's budget is not due until Oct. 1. New York's budget, however, was due April 1. The budget brawl in California took a new turn this week when Republican Gov. Arnold Schwarzenegger called his Democratic opponents "girlie men" for not passing a budget.

Despite the brighter fiscal picture, lawmakers remain wary about the financial outlook for fiscal 2005, NCSL said. Looming health care costs are a major reason. State legislatures last year had help from a one-shot $20 billion bailout from Congress. Half of the federal package ($10 billion) was to help states cover the rising costs of Medicaid, the state-federal program that serves 50 million poor and disabled Americans.

Without extra federal dollars for Medicaid this budget season, states coped by budgeting an extra 13 percent to cover states' share of Medicaid costs compared to a 4.8 percent increase last year.

Seven states raised taxes more than 1 percent, NCSL said. Of those seven, Arkansas, New Jersey and Rhode Island hiked taxes by more than 5 percent and Virginia increased taxes by nearly 3.8 percent.

Alabama, Alaska, New Jersey and Virginia are among the states that increased taxes on cigarettes or other tobacco products, generating a net increase of $330.4 million.

Only Maine and New Mexico cut personal income taxes while seven others raised them, including New Jersey, Maryland and Virginia.

After personal income and sales tax, fees generated the most revenue for states for fiscal 2005. Nineteen states hiked fees totaling $508 million in new revenue. But that is far below the $3 billion that 36 states generated in higher fees in 2003.

Some of the more unusual tax and fee hikes occurred in New Jersey, where residents will have to pay a new tax for certain cosmetic surgery, and in Maryland, where residents will pay a "flush tax" that adds $2.50 to septic and sewer bills to help clean the Chesapeake Bay.

Stateline.org staff writer Kathleen Hunter in Salt Lake City contributed to this report.