Three Western Governors Float Tax Hikes

Nevada Gov. Jim Gibbons (R) has steadfastly refused tax increases since being elected in 2006, choosing instead to make $1.2 billion in spending cuts this year as the Silver State struggles with a full-blown budget crisis.

Gibbons, however, is adjusting his anti-tax message.

Nevada’s budget director this month announced that falling tax revenues mean the state’s heavy cuts still leave it about $300 million short for the current fiscal cycle. Even worse, about $1.5 billion – or about 21 percent of the state’s projected overall budget – would have to be slashed to balance the books in the next two-year fiscal term, which begins in July. The numbers have led Gibbons to include tax hikes among his list of possible solutions.

“Nothing is off the table at this time,” the governor acknowledged to local reporters after meeting with key legislators Nov. 7 to discuss ways to plug holes in the state’s budget.

But Gibbons has provided few hints about what taxes might be increased, ruling out sales tax hikes or new levies on services and gold mining. Nevada’s fiscal picture has been darkened by an ailing housing market and shrinking tourism and gambling dollars, and the state has no income tax.

Gibbons isn’t the only governor mentioning tax increases as a way of tackling state budget problems caused by the national economic downturn.

In California, which is facing an $11.2 billion budget shortfall in the current fiscal year, Gov. Arnold Schwarzenegger (R) on Nov. 6 called a special legislative session and proposed a temporary 1.5-cent hike in the state sales tax as part of a broader plan to close the budget gap. The proposal also would expand the sales tax to more services, such as appliance and vehicle repairs.

“We are living in a different world now,” Schwarzenegger said. It is the second time this year the governor has proposed a sales tax hike; a similar proposal went nowhere during summer budget negotiations.

In Oregon, which so far has avoided serious shortfalls like those in California and Nevada but still faces concerns over declining revenues, Gov. Ted Kulongoski (D) on Nov. 10 proposed an economic stimulus plan partially funded by tax and fee increases. The plan would help pay for more than $1 billion in infrastructure improvements by hiking the gas tax by 2 cents per gallon and sharply raising registration and other vehicle fees.

The three states are the latest – but not the first – to raise or consider raising taxes in response to recent economic troubles. Lawmakers in a handful of other states, including Maryland, Michigan, Minnesota and New York, recently have approved tax hikes. And with signs of a national recession mounting, more governors could be heading down the same path.

According to a Nov. 6 report by the independent Nelson A. Rockefeller Institute of Government, state tax collections in the third fiscal quarter remained essentially flat compared with the previous year for the first time since 2002 and decreased in 17 of 42 states surveyed. Adjusted for inflation, third-quarter collections showed a 2.6-percent overall decline over the past year, according to the report, which predicted more bad news in the coming quarters.

Many states already have made deep cuts to services and exhausted other options, leaving tax hikes as an obvious alternative for lawmakers trying to come to terms with an extended economic downturn, said Nick Johnson, director of the State Fiscal Project at the Center on Budget and Policy Priorities in Washington, D.C.

“A small, short-term budget shortfall can be managed on the spending side alone. A very large and potentially long-lasting budget shortfall requires action on the revenue front as well,” Johnson said.

But tax increases remain politically unpopular and a last resort for many elected officials.

In Washington state, Gov. Chris Gregoire (D) won a second term on Election Day, but promised during a hard-fought campaign against Republican challenger Dino Rossi that she would not raise taxes. That pledge could complicate Gregoire’s second term as she addresses a state budget shortfall projected at $3.2 billion over two years.

In Maine, residents revolted against tax increases at the ballot box, voting by a 2-to-1 margin to repeal beverage tax hikes that lawmakers had approved only months earlier to help fund the state’s subsidized health insurance program.

The tax-hike proposals in California and Oregon already have met with opposition. Anti-tax advocates in Oregon have criticized Kulongoski’s plan as the wrong way to stimulate a sluggish economy. In California, where Schwarzenegger would need Republican support for a tax increase to pass the Legislature, GOP lawmakers have shown no inclination to follow the governor’s lead.

But Schwarzenegger believes he has a better chance of persuading lawmakers to side with his plan now that Election Day has passed. The governor said Republicans who were reluctant to support his proposal during the summer now can focus on balancing the budget and not winning re-election.

“We’re still in a profession where getting elected sometimes is more important than doing something (that) is right,” Schwarzenegger said.

In Nevada, meanwhile, Gibbons’ recent softening of his position on taxes has come as a surprise to many observers.

Opposing tax increases “is such a part of his political persona – and the core of his political base – that it shows how bad Nevada’s budget situation is,” said Eric Herzik, chair of the political science department at the University of Nevada at Reno . Gibbons’ willingness even to broach the subject of tax hikes shows an acknowledgment that he “can’t make it anymore with just cuts,” Herzik said.