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State Strategies to Manage Budget Shortfalls:Revenue Actions

Corina EcklNCSL

State Tax Trends 2009

– States used revenue raising measures to help close budget gaps– The net tax increase was $28.6 billion for FY 2010– Primary focus on high-income earners– Secondary focus on tax credits and exemptions– Imposition of temporary increases

2010– Much smaller net tax increase: $4.2 billion for FY 2011– Further focus on eliminating tax breaks– Voters weighed in on tax changes

Resource: NCSL’s “State Tax Actions,” various years

Net State Tax Changes by Year ofEnactment

$15.4

$28.6

5.4%3.7%

-5%-4%-3%-2%-1%0%1%2%3%4%5%6%7%8%9%10%11%

-$12-$10-$8-$6-$4-$2$0$2$4$6$8

$10$12$14$16$18$20$22$24$26$28$30

Billions of dollars

Percent of previous year's collections

Source: NCSL survey of legislative fiscal offices, various years. *FY 2010 figures are preliminary

3

Net Tax Changes by Type of Tax2009 & 2010

PersonalIncome

40%

CorporateIncome

7%

Sales & Use25%

HealthCare9%

Tobacco7%

Motor6%

AlcoholicBeverage

1%

Misc.5%

CorporateIncome

14%

Sales & Use40%

Health Care23%

Tobacco13%

Motor1%

AlcoholicBeverage

1%Misc.

8%

2009($28.6 Billion)

2010*($4.0 Billion)

Personal Income Tax: a decline of $629 million.

Source: NCSL survey of legislative fiscal offices, 2009 & 2010. *2010 figures are preliminary

Total Net Revenue Increases 2009

– Taxes: $28.6 billion– Fees: $3,349.6 million– Accelerations: $921.7 million– Other: $834.5 million

2010– Taxes: $4.0 billion– Fees: $69.4 million– Accelerations: $178.4 million– Other: $660.3 million

Source: NCSL survey of legislative fiscal offices, 2009 & 2010.

2009 Net Tax Changes in the Region

Illinois: $173 million (0.5 percent) Indiana: $214.1 million (1.4 percent) Iowa: $50 million (0.7 percent) Michigan: $0 Minnesota: $28.6 million (0.2 percent) Ohio: $535.1 million (2 percent) Wisconsin: $870 million (5.8 percent)

Source: State Tax Actions 2009

2010 Net Tax Changes in the Region

Illinois: -$44 million (-0.2 percent) Indiana: $0 Iowa: -$12.8 million (-0.2 percent) Michigan: -$14.8 (-0.1 percent) Minnesota: $60.9 million (0.4 percent) Ohio: $28.3 million (0.1 percent) Wisconsin: -$6.6 million (0 percent)


Sample 2009 Tax Actions

Focused PIT increases on high-income earners: DE, HI, NJ, NY, OR, WI Scaled back capital gains preferences: CO, RI, VT, WI Conformed to federal provisions reducing state revenue: IN, MD, MN,

NC, OR, OH Expanded sales tax base: IL, IN, WI Modified film/production tax credits: IN, KS & WI Reduced environmental credits: NY, OR, WI (WI delayed credit for

biodiesel fuel production) Raised cigarette taxes: 18 states including WI Hiked alcoholic beverage taxes: IL Changed the unemployment insurance tax: IN


Sample 2009 Tax Actions (Cont.)

Other revenue actions in the region:– Modified or created certain health fees/taxes: IN, IA, OH, WI– Increased vehicle fees: IL, MN, OH– Increased various court fees: IA, MN, OH, WI– Allowed video gaming terminals and allowed private management of

the state lottery: IL

Other actions:– MN: Governor terminated income tax reciprocity with WI


Sample 2010 Tax Actions

Tightened or eliminated tax credits/exemption: CO, IA, KY, NY, OK, WA Capped film tax credits: KY, NJ, NY Suspended some personal income tax credits: MN Postponed PIT reduction for one year: OH Continued phasing in previously enacted tax cut: IA Cut taxes in an effort to stimulate the economy: FL, IN, MD, MI, WI, VA Implemented a new sales tax holiday: IL Created Automotive Recovery Zones(CARZ): MN Boosted health care taxes: OH, WI


Sample 2010 Tax Actions (Cont.) Other revenue actions in the region:

– Approved tax amnesty program: IL, MI– Delayed or modified tax refunds: IL, MN– Adopted new casino licensing fee: OH

Voter actions:– AZ: Approved 3-year hike in sales tax rate– OR: Approved previously legislated tax increase– ME: Rejected a tax reform package– MA: Reinstated a sales tax exemption on alcoholic beverages– WA: Reversed several legislatively approved tax increasesSource: State Tax Actions 2010

2011 Actions: Illinois Increased personal income tax rate from 3 percent to:

– 5 percent (CY 2011-2014)– 3.5 percent (CY 2015-2025)– 3.25 percent (CY 2025 and beyond)

Increased the corporate tax rate from 4.8 percent to:– 7 percent (CY 2011-2014)– 5.25 percent (CY 2015-2025)– 4.8 percent (Cy 2025 and beyond)

Reinstated the estate tax Temporarily eliminated the NOL deduction

2011 Actions: Illinois Imposed a state spending limit:

– FY 2012: $36.818 billion– FY 2013: $37.554 billion– FY 2014: $38.305 billion– FY 2015: $39.072 billion

If state spending for any fiscal year exceeds the state spending limitation,the tax rates shall be reduced to 3 percent (PIT) and 4.8 percent (CIT)

Revenue Concerns Sluggish recovery of state collections Loss of one-time funds used in FY 2009, FY 2010 &

FY 2011– ARRA cliff– Rainy day funds, tax amnesty programs, fund

transfers, etc. Expiration of temporary taxes or repeal by voters Feasibility of increasing taxes or other revenues

Corporate Sponsorship?

A More Appropriate Sponsor?

www.ncsl.orgFor more information

Discussion Question

Will the Illinois tax increase pave theway for other states to raise taxes?

Magic Bullet? Romania now taxes fortune tellers and witches. Many witches have threatened to cast spells on the

government. Fortune tellers should have seen it coming.

2009 Actions

Expanded sales tax base to include sweetened tea, candy, grooming andhygiene products (IL)

ME expanded sales tax base to include several services andentertainment (Repealed by People's Veto)

KY, MA and VT removed the sales tax exemption for alcoholic beveragesales (MA measure just repealed last month by voters)

CO removed sales tax exemption for cigarettes Expanded sales tax base to include digital goods and software WI, NC,

VT (NC also included magazines) NY removed exemptions for limos and black car service TN removed exemption on software maintenance


2010 Actions: Oklahoma

Established a 12-month moratorium on an array of specified tax credits

Expected to generate more than $150 million in FY 2011

Source: NCSL Research

Tax Credit 2010 Actions: Iowa

Suspended the film tax credit Lowered the overall cap on business tax credits Cut the Supplemental Research Activities Tax Credit in half for large

corporations Cut other tax credit programs by 10 percent Implemented new, ongoing oversight to ensure regular scrutiny of all

credits


2010 Actions: Colorado Permanently eliminated the sales-tax exemptions on:

– Candy and soda– To-go containers and condiments used to serve food at restaurants

Suspended sales-tax exemptions on:– Purchases of energy used in manufacturing (2-year suspension)– A variety of compounds used in agriculture (3-year suspension)– Printed materials used in direct-mail advertising (3-year suspension)

Suspended for two years the senior homestead property tax exemption Reduced for three years an income-tax credit on conservation easements Capped credits for enterprise zone investment at $500,000 per year


2010 Actions: New York Requires taxpayers to add back state and local taxes deducted to federal

taxable income Limited personal income tax deductions for charitable contributions on

high-income earners (those making more than $10 million per year) to 25percent

Required taxpayers with more than $2 million in aggregated business taxcredits to defer amounts over $2 million

Eliminated sales tax exemption on clothing Eliminated the sales tax vendor credit for timely filing Eliminated provisions allowing private credit card companies to take sales

tax credits on uncollectable accounts Restructured the state property tax relief program so that it reduces

benefits for high-income taxpayers Source: NCSL Research

2010 Actions: Washington

Eliminated the sales-tax exemptions on:– Bottled water (repealed by Initiative 1107)– Candy & gum (repealed by Initiative 1107)– Livestock nutrient equipment

Narrowed the business and occupation tax exemptions for:– Direct sellers– Property management firms– Manufacturers of certain agricultural products (repealed by Initiative

1107)– The deduction of bad debt– First mortgage interest income


Other 2010 Actions

New Mexico: Added back state income tax deducted from federal taxableincome

Oregon: Limited the business energy tax credit

District of Columbia: Removed the sales tax exemption on soft drinks


Other 2010 Actions California: Legislature suspended deduction of NOL for another two

years Kentucky:

– Capped film tax credits– Limited domestic production tax credit to 6 percent– Limited manufacturing facilities reinvestment credit to 20 percent per

year Minnesota

– Repealed low-income motor fuels tax credit– Temporarily reduced the state-paid property tax refund for renters

New Jersey– Reduced the EITC– Adopted temporary limits for certain high-tech and film credits


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