Stateline Story

Is `No New Taxes' Mantra Fading in States?

  • March 19, 2007
  • By Pamela Prah

If 2006 was the year of surpluses for states, 2007 could be the year of tax hikes.

Five governors are proposing hefty tax increases to bankroll ambitious new health-care and education programs. Proposals to raise cigarette taxes are on the table in even more states, with the increased revenue going primarily to cover some of the nation's 46.6 million without health insurance.

Interest in raising taxes is strikingly different from the situation just a few years ago, when legislatures facing a fiscal crisis bent over backwards to avoid major tax hikes, instead raiding rainy day funds, borrowing money or expanding gambling to raise more revenue. Then, the aim was to keep the state budget out of the red. Now, the aim is to expand the reach of state government - often to provide health coverage for more citizens.

Illinois Gov. Rod Blagojevich (D) has pitched a whopping $6 billion in new business taxes to pay for his plan to extend health care coverage to 1.4 million uninsured adults. In Connecticut , Gov. M. Jodi Rell , a Republican, stunned state lawmakers with her proposal to lift the income tax rate by 10 percent to bring in $1.3 billion of new money for education.

he governors of Pennsylvania and Wisconsin both want to slap higher taxes on smokers and oil companies, with the extra cash going specifically to provide health care coverage to the uninsured and to patch roads. And Michigan is looking at higher business and "sin" taxes to close its $3 billion deficit and to enable more school districts to offer full-day pre-school to 4-year-olds.

This is states' first round of budgets since the 2006 election increased Democrats' hold on governorships to 28 and gave the Democratic Party the upper hand in 23 statehouses. Most, though not all, of the proposed tax increases come from Democrats.

Cigarettes taxes, now up to $2.58 per pack in New Jersey, the highest in the country, were frequently tapped to plug budget holes in many states through the 2001-05 economic downturn. Now, they're popular as a source of revenue for new spending. Iowa Gov. Chet Culver (D), for example, has already signed into law his $1 tax hike on a pack of cigarettes - more than tripling the prior 36-cents-a pack rate. The new money will go toward curbing smoking and providing health insurance to needy children.

While pressure is building in a number of states to cut property taxes this year, so is interest among some politicians to bump up certain taxes and use the money for specific projects that might have been ignored during the years of budget cutbacks.

One reason steeper taxes may be attractive is that states have big-ticket items looming on the horizon that must compete for scarce state dollars. Spending on existing education and health care programs typically eats up more than half of a state budget, leaving the rest to be divvied up between transportation projects that have been put on hold, future pension and health care needs for state retirees, and costly federal mandates such as REAL ID, a law that requires states to beef up the security of their driver's licenses.

State revenues are generally healthy, but no one is banking on the extra cash that a strong economy brought to most state coffers last year. "Some states will land with surpluses, but it won't be as universal as last year," predicted Scott Pattison, executive director of the National Association of State Budget Officers.

Sujit CanagaRetna, a state fiscal expert at the Council of State Governments, said that tax collections, particularly the sales tax, appear to be weakening in some states. And talk of a possible recession later this year, including comments from former Federal Reserve Chairman Alan Greenspan, has some states jittery, he said. "The economy seems to be in a slow-down mode. … A lot of folks are getting nervous," CanagaRetna said.

Several states already are facing huge holes in their budgets. In the Rust Belt, Illinois and Michigan are struggling to close deficits of $2 billion and $3 billion, respectively. California and Florida are each looking at $1 billion shortfalls for new fiscal years that begin July 1.

Nick Johnson, who heads up the state fiscal project of the Center on Budget and Policy Priorities, said the fact that so many of the proposals dedicate the new money to help those without health care insurance "reflects the imperative that states feel somehow, someway, they must expand health care." He also contends that tax increases, at least targeted ones, are becoming more politically acceptable. "We are starting to see some softening of the 'no-new taxes' sentiment. … It doesn't have the same force it used to have," he said.

At least two proposals take aim at the oil industry, in the wake of recent gasoline price increases. "Six years ago, states went after tobacco companies, now it's oil companies' turn," said Chris Atkins, an attorney who specializes in state taxes for the Tax Foundation , an organization that rates state tax burdens.

But some anti-tax groups say states need to do a better job of managing their money. "It's shocking that states can pounce so quickly on the surpluses and start prowling around for more [money] through tax increases," said Pete Sepp, a spokesman for the National Taxpayers Union , a group that advocates limits on state spending.

While governors' budgets are essentially their wish-lists and priorities for state spending, their proposals often serve as starting points for legislatures that must balance state ledgers. Among the proposals for higher taxes:

  • Illinois's Blagojevich wants to impose a gross receipts tax on businesses that have gross revenue of more than a $1 million a year and a 3 percent payroll tax on employers that fail to offer health insurance. The new revenue would pay for his health care and education proposals.
  • Connecticut's Rell wants to add 49 cents to the state's $1.51 per-pack cigarette tax to pay for health insurance programs. This increase would be in addition to the income tax increase.
  • Pennsylvania Gov. Ed Rendell (D) has proposed a 6 percent tax on oil company profits to pay for mass-transit projects and an increase from 6 percent to 7 percent in the state sales tax to fund education programs and to cut property taxes. He also wants to tack 10 cents more onto the state's $1.35-a-pack levy on cigarettes and create a new 36-cent tax on cigars and smokeless tobacco to help cover those without health insurance.
  • Wisconsin Gov. Jim Doyle (D) wants to tax hospitals 1 percent of their gross revenue and boost to $2.02 from 77 cents the tax on a pack of cigarettes in his bid to see that 98 percent of Wisconsin residents are insured. Doyle also wants both a new 2.5 percent tax on oil companies' profits and a law preventing companies from simply passing the tax on to consumers by raising pump prices.
  • Michigan Gov. Jennifer Granholm (D) has proposed a new 2 percent excise tax on most services, a 5-cent increase in the $2-per-pack levy on a pack of cigarettes and a 10 percent jump in the liquor tax to help close the state's $3 billion deficit and expand early childhood education by $200 million.
  • Virginia Gov. Timothy Kaine (D) had wanted a statewide sales tax increase on vehicles to help pay for the state's transportation needs, but the Republican-controlled Legislature instead sent him a bill that calls for relying on bonds and giving certain local officials the green light to raise local taxes. The legislators' regular session already has ended, but the governor has until March 26 to come up with amendments. Lawmakers will return April 4 to consider those changes.
  • Delaware Gov. Ruth Ann Minner (D) has called for adding 5 cents to the state's 23-cent-a-gallon fuel tax to help pay for road construction and 45 cents to the current 55-cents-a-pack cigarette tax to pay for new programs to reduce infant mortality and improve children's health.
  • Indiana Gov. Mitch Daniels (R) wants the state's 55.5-cent-a-pack cigarette tax to go up by at least 25 cents to fund health insurance coverage and anti-smoking programs.
  • Oregon Gov. Ted Kulongoski (D) is calling for an 84.5-cent increase to the state's $1.18-a-pack cigarette tax to provide health insurance to uninsured children .
  • Tennessee Gov. Phil Bredesen (D) wants a 40-cent increase in the current 20-cent state tax on a pack of cigarettes to pay for education programs, including an expansion of pre-school for 4-year-olds.