Business Taxes
State Budget Problems
Will Only Get Worse
Revenues aren't keeping pace with spending, no matter how many cuts states make.
By Richard Sammon, Senior Associate Editor, The Kiplinger Letter
July 28, 2010
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For states wrestling with budget shortfalls, there’s no light at the end of the tunnel.
Their immediate problem is twofold: Tax revenues aren’t rising fast enough because too many people are jobless, and too few are spending.
See Our Slide Show: 10 Surprising Ways Your State May Tax You Next
And help from Washington is winding down. Most states survived 2009 because of the stimulus -- an infusion of about $230 billion, most of it with few strings attached. Making matters worse is a run on states’ social services as more people without jobs or health insurance seek help from public agencies. And most state rainy-day funds were emptied long ago.
The result: Budget gaps that are opening faster than they can be filled. New Jersey’s new Republican governor, Chris Christie, bit the bullet and cut spending 9% to balance his fiscal 2011 budget, but already faces a $10.5-billion shortfall for 2012. Forty-six states had to revamp their budgets for fiscal year 2011 -- which started July 1 for most of them -- and 18 of them have gaps that are larger than 20%. Only Arkansas, Alaska, Montana and North Dakota enjoy black ink.
States have no choice but to slash spending, and they are -- big time. Forty-two are cutting state payrolls with some combination of layoffs, pay cuts and furloughs. Forty-one states are reducing funding for public universities and colleges. Thirty are cutting K-12 school aid. The same number are trimming health care.
They’re also raising taxes: 17 nudged up sales taxes. Thirteen hiked income taxes, 22 raised excise taxes, and 17 hit businesses with higher rates or fewer breaks.
See our slide show: States Gunning for Your Money with Service Taxes
More creative solutions are in the works, including combining programs, applying more user fees, spreading the tax net to services and going after tax cheats. California and Florida are hiring more auditors to scrutinize returns. Georgia, New Jersey and New York are monitoring small businesses to make sure they’re not hiding income or siphoning off sales taxes. Louisiana is considering a tax on van and truck rentals, while Kentucky mulls an unpopular tax on golf greens fees. Oregon may tax commercial driver education and interior decorating. Iowa, Nebraska and Wisconsin will suspend various business tax breaks for biotech and drug research companies. California lawmakers even passed a bill to sell advertising on license plates, but dropped it when it was ridiculed by residents.
The states’ woes are sure to hamper economic growth. Total state and local spending accounts for 12% of GDP, so any significant pullback is sure to have an effect. And even when the economy improves, another problem looms large: Underfunded liabilities to provide retirement benefits for state employees. States are only beginning to wrestle with painful solutions to that potential crisis.
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Reader Comments (6)
Posted by: Frank at 07/29/2010 10:21:24 PM
Government workers do not contribute to the GDP. They are parasites to the national economy. The gravy train is coming to an end for many of these people and that's exactly what this country needs.
Posted by: Bruce Allen at 07/31/2010 09:03:42 PM
Instead of down sizing police and fire departments, why not try down sizing government?
Posted by: clare at 08/02/2010 03:12:48 PM
Frank, which government employees would you like to eliminate as unnecessary parasites? Would it be teachers, police and other law enforcement agencies (SBI, FBI), firefighters, social services workers, military members and the GS civilians who often work side by side with military people, people who work during times of emergency (FEMA) or perhaps we could get rid of the national security people. This is just a very short list of those who are government employees at local, state or federal level. They contribute some very important services, work very hard for their pay and deserve our gratitude. I don't know which government workers are on the gravy train you are referencing, Frank, but it's best not to dump everyone into one lump and then make a general statement about these folks.
Posted by: Anna at 08/02/2010 07:58:52 PM
Is that so? I will have you know that government workers are also taxpayers and voters just like you. They are also consumers who shop at the grocery stores, pay their mortgages, rent, utilities etc. JUST LIKE YOU DO. If you think government workers are on a gravy train you are sadly mistaken. The average worker is making an annual salary of 20K-40K per year and that is before taxes are taken away (some gravy train). I am so sick and tired of people blaming government workers for everything that is wrong with the current economic crisis. Why don't you focus the blame where it really belongs? Such as those CEO's of those mega corporations who walked away with people's life savings and laughed all the way to the bank. The legislators in Albany who are more concerned with lining their pockets than seeking the interest of the people who voted for them. The irresponsible out of control spending in Albany and Washington. Why don't you lay the blame there instead of trying to blame people who had nothing to do with the current economic situation.
Posted by: Robyn at 08/02/2010 08:00:56 PM
tax paid workers contribute to GDP? Have to mull that one over awhile. What some of these folks make in correlation to their position is dumbfounding and the pension is simply not a sustainable system at these levels of pay. I like Franks comment.
Posted by: Shad at 10/01/2010 01:41:32 AM
More tax increases. How about cutting the pay of those earning more than $70,000 which probably are about 50% of State employees? Considering that State employees get automatic pay increases every year, then tax increases are just going to keep coming. Heck, I'm sure a State employee shouldn't even earn more than $50,000 a year, at this stage of the game. Here in the San Francisco Bay Area, most police officers make about $500,000 a year. You read that right. So, is it a surprise that everything is going to h---?