Budget shortfalls: How other states are solving the problem

Illinois is contemplating a 50 per cent hike in income taxes, following the lead of 32 other states that have raised taxes to balance their budgets or are considering tax increases.

Arizona eliminated aid for disabled people who are waiting for their Social Security benefits. But some states, including Iowa, expanded health care for the uninsured even while they cut elsewhere. 

Colorado delayed the opening of a prison, suspended a tax break for senior citizens and raised fees on everything from vehicle registrations to marriage licenses. Most other states have been equally creative in spreading their fiscal pain.

Like Minnesota, every state in the nation is wrestling with jaw-dropping revenue shortfalls.

“The fiscal situation facing states is like a bad horror movie — the details get more gruesome and the story never seems to end,” said analysts at the National Conference of State Legislatures.

The tax debate
Like Minnesota Gov. Tim Pawlenty, some officials are refusing to raise taxes.

But a majority of states are taking the view that tax increases must be on the table along with spending cuts in order to sustain programs — such as retraining laid off workers and filling gaps in health coverage — their citizens urgently need in tough times like these.

As recently as a few months ago, states were reluctant to even look at taxes as a remedy for budget shortfalls, said Brian Sigritz, a staff associate for the National Association of State Budget Officers in Washington, D.C.

But hesitance faded as the recession deepened and revenues plummeted, and at least 16 states already have enacted tax increases.


2009 state tax increases
Courtesy of the Center on Budget and Policy Priorities
Note: Minnesota is shown as a state with an active proposal to raise taxes, which was technically correct until Gov. Tim Pawlenty vetoes the final bills, which he has said he plans to do.

Like Minnesota’s DFL-controlled Legislature, lawmakers across the country first took aim at cigarette and alcohol taxes, where increases are most politically acceptable, Sigritz said.

“Now, as shortfalls get more serious, they are looking more seriously at sales taxes and personal income taxes,” he said.

That’s true across the political spectrum.

“We’re seeing states now with Republican and Democratic governors alike looking at tax increases, so I don’t think it’s strictly a partisan issue one way or the other,” Sigritz said.

Widening gaps
The national change of heart came as revenues collapsed in state after state, slashing wide gaps across budgets.

“Budget gaps are surging to new heights, renewing alarm among state lawmakers who must balance their budgets,” said the National Conference of State Legislatures. “The trend is disturbing, and the latest figures are staggering.”

Last November, 26 states were forecasting a budget gap for the next fiscal year, totaling $64.7 billion. By April, the expected gap had grown to $121.2 billion in 42 states.
 
Federal stimulus money has helped. But virtually every state has been forced into painful spending cuts. In Michigan, 100 state troopers will be laid off in order to help erase a $1 billion deficit, the Detroit Free Press reported.

Some states are in even worse straits than Minnesota with its $3 billion budget hole.

Illinois is trying to fill a $12 billion gap — an amount equal to 40 percent of what the state spends in a year for day-to-day operations, the Chicago Tribune reported. Facing a May 31 deadline for balancing the budget, Illinois is in such grim fiscal shape that news reports routinely call Democratic Gov. Pat Quinn’s package of remedies “the doomsday plan.” Among other steps, Quinn would put off billions of dollars in payments due to state employees’ pension systems.

“We’ve seen a lot of across-the-board cuts,” said Arturo Perez, a fiscal analyst with the National Conference of State Legislatures. “The magnitude of the shortfalls doesn’t give them the luxury of picking and choosing.”

Nightmare won’t end
And the nightmare doesn’t seem to be over, even for states that thought they had balanced their budgets for the next fiscal year.

After April tax returns came in miserably low, revenue-expense gaps widened further than expected, Perez said. Before adjourning, some legislatures braced their states for more bad news by giving their governors options for closing future gaps. In Colorado, for example, the general assembly authorized the governor to drain a reserve fund if the budget falls back out of balance.

It wasn’t clear this week to the experts who track these matters in the states whether any other governor is following the strategy Pawlenty took this week. He declared he would veto the Legislature’s tax-increasing attempts to balance the budget and then use his rarely invoked power of “unallotment” to make cuts where he thinks they are needed.

Sigritz at the state budget officers association said he had not heard of any other governors taking such a go-it-alone strategy. But governors’ powers vary greatly from state to state, he said, and some couldn’t do it if they wanted to.

“In some states the legislature has to approve any cuts,” Sigritz said. “And some governors are considering calling back their legislatures for special sessions.”

While Republicans in some other states are going along with tax hikes, left-right priorities are defining differences from state to state.

In Colorado, Democrats who control the governor’s office as well as the general assembly protected social programs such as a plan that provides health care for at least some of the uninsured. In Minnesota, one of Pawlenty’s controversial moves this year was to veto funding for the state’s General Assistance Medical Care program which provided health care for more than 30,000 of the poorest Minnesotans.


Tax increases during the last two recessions
Courtesy of the Center on Budget and Policy Priorities

A look at other states
It will take months, before Minnesotans can fully compare their elected officials’ decisions and priorities with those in other states.

Here’s a look at some state actions that were tracked by the Center on Budget and Policy Priorities in Washington, D.C., and other sources:

• New York adopted a budget that cuts services and also increases taxes, including new temporary income tax rates for the highest-income filers. The state also limited itemized deductions for taxpayers making over $1 million, reduced a credit on New York City’s personal income tax, eliminated a property tax rebate and expanded sales tax collections on Internet purchases.

• California’s voters on Tuesday rejected five ballot propositions, including Republican Gov. Arnold Schwarzenegger’s proposal to cap state spending while also prolonging temporary tax increases and shoring up a rainy-day fund. Earlier, state officials had enacted the temporary increases which included increasing the sales tax by 1 percent and the income tax rate by 0.25 percent. They also had reduced tax credits for dependents and raised a vehicle license fee. 

• Wisconsin still is wrestling with its budget, but it has moved to raise new revenue by broadening the state’s sales tax to include digital downloads and specialized computer software. The state also enacted new hospital assessment fees. And it expanded the corporate income tax base to cover more multi-state corporations. Now, the state is debating higher cigarette taxes, broader taxation of capital gains and a new, higher tax rate for individuals earning more than $225,000 and couples earning more than $300,000.

• Iowa cut spending by about $270 million, but it also expanded health coverage for children with a $7.5 million package intended to cover 53,000 kids.

• Hawaii increased income tax rates for the highest-income taxpayers. It also increased hotel taxes, real estate transfer taxes, and tobacco taxes.

• Virginia raised revenues by restructuring an income tax credit and taxing some investment income of corporations.

• Arkansas, Kentucky, Rhode Island and Wyoming approved increased excise taxes on alcohol products, tobacco products, or both.

At least 16 other states are considering increases in taxes or fees, the budget center reported.  Seven of them are weighing sales tax increases. For example, Massachusetts has looked at a proposal to expand the sales tax base to include candy, sweetened beverages and alcohol; and this week, its Senate is debating an overall increase in the state’s sales tax to 6.25 percent.

And at least 10 states are scrutinizing deductions and exemptions in personal and corporate taxes as well as excise taxes on items like tobacco and hotel services.

State officials hope that drastic measures they take now can be eased when the recession ends and revenues rebound. For now, though, no one can say when that will happen. 

Sharon Schmickle writes about national and foreign affairs and science. She can be reached at sschmickle [at] minnpost [dot] com.

Comments (9)

  1. Submitted by Jeff Klein on 05/21/2009 - 11:10 am.

    Cold Alabama, here we come. Thanks, Pawlenty and conservatives. They tell us that if we raise taxes, people will move away. I think that only self-serving, myopic jerks will move away and we don’t want them anyways. As someone who received an excellent education in Minnesota, I know the state is in danger of losing me if we destroy everything that makes it great.

  2. Submitted by Francis Ferrell on 05/21/2009 - 11:52 am.

    The Minnesota Legislature and Governor Pawlenty missed a grand opportunity to show other states to get their states’ budgets balanced for the long term.

    Common sense tax system reform and fairer [straight forward] progressive tax increases based on income revenues should have been the budget reliever and balancer that would have rescued MN out of the budgetary abyss.

    Liberals as well as conservatives could have found common ground for a compromised balanced budget for the long term but provincial narrow minded thinking prevailed instead. Now we have a governor who,by default, has become the monarchical [dictatorial?] authority to slash-&-burn the state’s overburdened budget for the short term. When is this political madness and ignorance going to stop?

    In the end the folks who will suffer the most are the honest citizens just trying to survive this economic crises. Minnesota nice has become an oxymoron for MN worst!

    The state of Minnesota could have shined above the abysmal US and state’s economic dilemmas with innovative, creative, and progressive fiscal economic thinking that could carry us through the long term. Instead state government, executive and legislative, seems more obsessed with political turf wars and disingenuous reactionary political dichotomies that will only make a citizen’s plight more unbearable.

    Occam’s Razor Principle seems appropriate here. With all things and/or problems, under question, being

  3. Submitted by Norman Larson on 05/21/2009 - 11:58 am.

    It is beyond my comprehension why anyone who is not a multi-millionaire would vote for a Republican.

  4. Submitted by Jeremy Powers on 05/21/2009 - 12:03 pm.

    Conservatives all talk about the “never ending tax increases.” Here’s a reality check. Except for the gasoline tax, which is really a user fee, and the Legacy Amendment sales tax increase that the citizens voted for themselves, the last state-wide tax increase was 1994 when the sales tax was increased by 0.5 percent. Since then, income taxes for the rich have actually gone down and so have taxes on businesses. And in 2001 we were “supposed” to shift the cost of state services purely to the state and away from property taxes to reduce property taxes. This occurred because we had all this extra money. During the period from 1999 to 2001 the state gave back $2.7 billion in taxes. However, since that time, revenue from sales taxes have gone down, thanks greatly to people buying big-ticket items on the Internet. Of course property taxes have shot up because as the state has shrugged off its duties of state support they adopted in 2001, thanks in part because Pawlenty will raise no tax for any reason.

  5. Submitted by Eric Ferguson on 05/21/2009 - 12:06 pm.

    So many states did what was obvious, mixing budget cuts and tax increases. Other states had Democrats agreeing to painful cuts and Republicans agreeing to raise taxes. What went wrong here? We had Democrats making painful cuts, and Republicans willing to…oh, right. Taxophobic Republicans and governor thinking about winning the GOP primaries in 2012.

  6. Submitted by Ted Snyder on 05/21/2009 - 01:40 pm.

    Of course enhanced revenues should be part of the solution. The reason they are not is because the State of MN is being sacrificed to the ideology that will irresponsibly shrink government, drag it into the bathtub and drown it. Government is the means we have to address the common good. It is a way to guarantee social well being in the midst of economic mayhem. What the Pawlenty administration is doing by vetoing new revenues during a time of crisis is unconsciounable. To cite the overused, but homey, image of the family around the kitchen table figuring out what to do in the face of a layoff. Yes, cut expenses. But also go out and get a part-time job to replace lost income.

  7. Submitted by Henk Tobias on 05/21/2009 - 08:46 pm.

    We can all take comfort in the fact that, while many of our fellow citizens will suffer, T-Paw may have a shot at higher office. What’s a little sacrifice for the many compared to the dreams of one man? Its funny, Timmeh was raised in the Democratic household, but he assimilated so thoroughly into the Republican mindset.

  8. Submitted by Joe Johnson on 05/21/2009 - 10:01 pm.

    I’m so impressed this was only a mild posting of the grossly uninformed. So everyone that is crying about “revenue” stabilization, how is your immaculate progressive tax reform going to stabilize “revenue” when the basis for progressivity is income tax. Income tax as you probably don’t know fluctuates severely with economic conditions and with NOL’s for corporate taxpayers can last even longer. The only real solution for “revenue” stabilization is charging an actual (or for you minnposters near actual) price for the government that you consume.

  9. Submitted by Ray -Edina on 05/22/2009 - 08:10 am.

    Any fix for the current budget problems, I believe, will have to be more to the long term side than short term. What has got is in this situation is primarily connected to the housing crisis (ie. foreclosures) and as a real estate agent, I do not see this ending soon. April was a huge month on foreclosure notices going out, which means, in around 6 to 8 months from now, more foreclosed homes will be coming on the market, further depressing home values and especially, consumer confidence which will further erode tax revenues to the state. Then we have foreclosures notices coming for May, June, July, etc, etc, etc. Unfortunalty, this maybe going on for a while. The housing situation started with unwise mortgage policy and now adding to this is unempolyment rate.

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