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Tax Planning

State Taxes Spiral Upward

Hiking sales levies is a top way states aim to close budget gaps.

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Drivers who suffer the New Jersey Turnpike’s epic traffic could once count on at least one consolation. They could pull over at a rest stop honoring a New Jersey native—such as the aptly named Molly Pitcher service area—and fill up their tanks with cheap gas.

SEE ALSO: Strangest Ways States Tax You (and Don't)

The service areas remain, but the low-priced gas is gone. Late in 2016, New Jersey Gov. Chris Christie signed legislation that raised New Jersey’s gas tax from 14.5 cents to 37.5 cents a gallon. Overnight, the state’s gas tax jumped from the second-lowest in the country to the seventh-highest. Funds from the tax hike will be used to shore up the state’s deteriorating roads and bridges.

Although President Trump has pledged to cut federal taxes, state taxes are rising across the U.S. as financially strapped states and municipalities search for ways to close widening budget shortfalls. In April, Louisiana hiked its sales tax by one per­centage point, boosting the state’s average combined state and local rate to 9.99%, the highest in the U.S. But there has been pushback, too. In November, Oklahoma voters rejected a similar proposal to increase the state sales tax by a percentage point to raise money for schools.

Other new or proposed tax increases target specific products or services. Lawmakers in Pennsylvania voted in 2016 to extend the state’s 6% sales tax to digital streaming services and downloads. Starting January 1, Pasadena, Calif., imposes its 9.4% sales tax on streaming video providers, such as Netflix, and more than 40 other California cities are contemplating a similar move. E-cigarettes are another popular source of tax revenue. Pennsylvania’s tax package slapped an excise tax on e-cigarettes, making the state the sixth to impose such a levy on vapor products. More than 20 other states are considering a similar tax.

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Some states are raising rates on their wealthiest inhabitants. In November, Maine residents narrowly approved a 3% income tax surcharge on residents who earn more than $200,000. The tax hike, which will be used to fund public education, raises Maine’s top tax rate to 10.15%, the second-highest in the country. Meanwhile, Californians voted for a measure to extend higher income tax rates for the state’s top earners through 2030. The three tax rates, which start at 10.3% and top out at 13.3%, were originally scheduled to expire in 2018.

Even Alaska, which has long been a low-tax haven, is feeling the heat. To offset a sharp decline in oil revenues, Gov. Bill Walker has proposed a 3% statewide sales tax, which he says is needed to close the state’s $3.2 billion budget deficit. Alaska currently has no income tax or state sales tax.

Increasing existing state taxes or imposing new ones could backfire. Technology makes it easy for individuals and businesses to move to states—or countries—with lower tax rates, says Joe Henchman, vice president of legal and state projects for the Tax Foundation, a policy research group. “Everybody is under the gun to be more competitive, whether it’s government or the private sector,” he says.

With that in mind, some of the tax increases are due to expire or are coupled with relief in other areas. For example, the package agreed on by New Jersey lawmakers will gradually increase the amount of retirement income that’s sheltered from taxes through 2020, when married couples will be able to exclude up to $100,000. Plus, the amount of assets excluded from the state’s estate tax rises to $2 million from $675,000 on January 1, and the estate tax will disappear in 2018.

See Also: State-by-State Guide to Taxes