taxes

State Taxes Spiral Upward

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

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.

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.

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.

 

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
How to Calculate the Break-Even Age for Taking Social Security
social security

How to Calculate the Break-Even Age for Taking Social Security

When it comes to maximizing your Social Security benefits, there are many elements to consider. One factor that can be especially enlightening is your…
August 30, 2021
Spend Without Worry in Retirement
Financial Planning

Spend Without Worry in Retirement

Fears of running out of money prevent many retirees from tapping the nest egg they’ve worked a lifetime to save. With these strategies, you can genera…
August 30, 2021

Recommended

Child Tax Credit Payment Schedule for the Rest of 2021
Tax Breaks

Child Tax Credit Payment Schedule for the Rest of 2021

The IRS has already sent three batches of monthly child tax credit payments. Here's when you can expect the rest of your payments.
September 16, 2021
What Are the Income Tax Brackets for 2021 vs. 2020?
tax brackets

What Are the Income Tax Brackets for 2021 vs. 2020?

There are seven different federal income tax brackets for your 2021 tax return – each with its own marginal tax rate. Which bracket you end up in for …
September 14, 2021
When Are 2021 Estimated Tax Payments Due?
tax deadline

When Are 2021 Estimated Tax Payments Due?

If you're self-employed or don't have taxes withheld from other sources of taxable income, it's up to you to periodically pay the IRS by making estima…
September 14, 2021
The RMD Solution to the Hassle of Filing Estimated Taxes in Retirement
required minimum distributions (RMDs)

The RMD Solution to the Hassle of Filing Estimated Taxes in Retirement

If you don't need the money to live on, wait until December to take your RMD and ask the sponsor to withhold a big chunk for the IRS.
September 14, 2021