Raising taxes is presumed impossible in Minnesota this year, given that Gov. Tim Pawlenty has veto power to back his no-new-taxes resolve. But most other states — including some with GOP governors — did raise taxes to help save themselves from sinking deeper into fiscal quicksand, says a new report [PDF] from the National Governors’ Association and the National Association of State Budget Officers.
Whether or not tax increases can be a realistic option for easing Minnesota’s urgent budget problems this year, they are the hottest issue in races to determine who will replace Pawlenty and who will sit in the next Legislature.
Depending on the candidates who emerge as frontrunners, the upcoming election could become a referendum on the tax question.
And it’s virtually certain that Minnesota’s next governor will face intense pressure to raise taxes because state revenues are unlikely to rebound quickly, even with nationwide recovery from the Great Recession.
“State revenue collections historically lag behind any national economic recovery,” the report said. “State revenues will remain depressed throughout fiscal 2010 and likely be sluggish into fiscal years 2011 and 2012.”
So, whatever happens at the State Capitol during the legislative session that started last week, examples from other states are useful and relevant for Minnesota voters in 2010.
Worst since Great Depression
Twenty-nine states bolstered revenues this year, mainly by raising personal and/or corporate income taxes and expanding sales taxes as well as taxes on gas, liquor and tobacco.
The increases were driven by “one of the worst, if not the worst, fiscal periods since the Great Depression,” the report said.
In some states, voters have approved the increases. In others, they have punished the responsible politicians. And anti-tax voters are furious from coast to coast.
Revenue increases enacted by states with similar populations, 2010 FY (in millions)
Minnesota could be counted among the revenue raisers. It did press more muscle into collecting taxes people owed under the existing rates. It gained a bit more by tinkering with the tax code to bring it in line with federal tax changes. And it raised several kinds of fees — for example, fees the courts collect for things like parking tickets and civil filings.
But those revenue gains were baby steps compared with the long strides many other states took to increase revenue as part of their budget balancing strategies.
‘Assisted suicide’ or fiscal lifeline?
Several states raised personal income taxes. A prime target was high-income earners — a group eyed by some DFL gubernatorial candidates in Minnesota.
Playing it politically safe, the Oregon legislature put this strategy to voters in a referendum in January this year. Nike founder and chairman Phil Knight campaigned against the tax increases, dubbing them “Oregon’s Assisted Suicide Law II” and predicting “thousands of our most successful residents will leave the state,” Forbes reported.
Even so, Oregon’s referendum passed with 54 percent approval for the plan to increase personal income tax on individuals earning more than $125,000 and couples making more than $250,000.
New Jersey voters were not so forgiving of Democratic Gov. Jon Corzine’s tax hikes. They ousted him in November for a variety of reasons. But one of the many points used to bruise him in the campaign was the roll back of the property tax deduction for those making more than $250,000. New Jersey also had enacted rate increases for taxpayers earning more than $400,000.
Here are examples of other states that took a bigger bite from top income earners (not a complete list, by any means):
• Connecticut raised its rate from 5 to 6.5 percent for single filers earning more than $500,000 and married couples earning more than $1 million. The revenue gain: $618 million.
• Wisconsin created a new tax bracket with a 7.75 percent marginal rate for single filers earning more than $225,000 and married couples earning more than $300,000. It also decreased the capital gains exclusion from 60 percent to 30 percent except for gains on sales of farm assets. That moved the Badger State $279 million closer to a balanced budget.
• North Carolina placed a temporary surcharge on upper-income taxpayers, effective for tax years 2009 and 2010. The surcharge is 2 percent for married filers with incomes between $100,000 and $250,000 and single filers with income between $60,000 and $150,000. For incomes above those levels, it rises to 3 percent.
Taxing limos, bourbon and HMOs
Most states count on sales taxes for about one-third of their general fund revenues. Twelve states have moved this year to pad that share of their revenues by more than $6 billion collectively. A few examples:
• California increased the state sales tax rate by 1 percent to raise $4.4 billion.
• Massachusetts increased its rate by 1.5 percent, extended the tax to direct broadcast satellite service and eliminated the exemption for sales of alcohol. The upshot is $890 million in new revenue for the state.
• New York expanded its sales tax — among other ways, by imposing the tax on black-car and limo services.
• Kentucky, the bourbon capital, applied the tax to sales of packaged liquor in order to raise $52 million.
Several states increased special taxes on alcoholic beverages: New York, North Carolina, Tennessee and Vermont.
Even more upped their tobacco taxes. Of 17 states that stepped up taxes on tobacco, the biggest revenue gainers were Arkansas, Connecticut, Kentucky, Mississippi, Pennsylvania, Texas and Wisconsin.
Getting creative, 16 states found ways to squeeze a collective $1 billion from other sources, ranging from taxes on estates to slot machines to taxicab rides. Tennessee expects to raise $137 million in taxes on Health Maintenance Organizations.
Lucrative fee hikes
Fee increases were even more lucrative, adding more than $5 billion to state revenues across the land. A few examples:
• California stands to collect $1.7 billion from a 0.5 increase in vehicle license fee rates.
• Florida is collecting an additional $622 million in fees related to courts, drivers’ licenses and vehicles ranging from motor homes to motorcycles.
• Utah is increasing fees on everything from notary licenses to temporary drivers’ permits to scrape up an extra $79 million.
Enough with this dizzying array of tax schemes.
There is no quiz — just this takeaway point: Minnesota will have plenty of ideas to debate in this election year and plenty of examples to study across the country.
Sharon Schmickle covers science, economics, Greater Minnesota and other topics.