The Six States Where Taxes Are Soaring

24/7 Wall St.: 6 States Where Taxes Are Soaring

As the economy struggles to recover, state and federal budget deficits continue to be the subject of increased attention. Just last week, the congressional budget office said that President Obama’s budget will produce a $1.3 trillion deficit in 2012 if enacted. It would be the fourth straight year of $1 trillion-plus deficits.

Many states have not been faring much better in their attempts to balance the budget. The recent recession resulted in some of the worst declines in state revenue since World War II, according to a recent report on state budgets by the Brookings Institution. In fiscal year 2010, a record 43 states faced budget deficits. In their fight to shrink their deficits, states have cut spending by slashing programs and lowering costs, while increasing revenue mostly by raising taxes.

According to the Brookings report, a whopping 40 states raised taxes between fiscal year 2009 and 2011. Only eight cut taxes. Based on the report, 24/7 Wall St. examined the six states that increased revenue from taxes by 9% or more during the period. While these states increased revenue the most, spending cuts appear to be critical to managing deficits for nearly all of the states.

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The Six States W... As the economy struggles to recover, state and federal budget deficits continue to be the subject of increased attention. Just last week, the congressional budget office said that President Obama’s budget will produce a $1.3 trillion deficit in 2012 if enacted. It would be the fourth straight year of $1 trillion-plus deficits.

Many states have not been faring much better in their attempts to balance the budget. The recent recession resulted in some of the worst declines in state revenue since World War II, according to a recent report on state budgets by the Brookings Institution. In fiscal year 2010, a record 43 states faced budget deficits. In their fight to shrink their deficits, states have cut spending by slashing programs and lowering costs, while increasing revenue mostly by raising taxes.

According to the Brookings report, a whopping 40 states raised taxes between fiscal year 2009 and 2011. Only eight cut taxes. Based on the report, 24/7 Wall St. examined the six states that increased revenue from taxes by 9% or more during the period. While these states increased revenue the most, spending cuts appear to be critical to managing deficits for nearly all of the states.

(iStock Photo)
1. Delaware Increase in personal income tax: none
Expenditure per capita (2008): $6,800 (3rd highest)
2009 budget shortfall: 12.2% (18th highest)
Home price decline from peak: 20.3% (16th largest)

In the past three years, the state of Delaware spent $6,800 per person in its annual budget, approximately two-and-a-half times as much as Nevada. The state’s government spent the 10th-most per person in the country on Medicare in 2009, and the 13th-most per person on pensions. In its fiscal year 2011 budget, the state was forced to address an 11.4% budget gap by cutting funds to education and the state workforce.

Despite these cuts, the recession has weighed heavily on the state’s budget. Delaware has experienced among the biggest declines in home values in the country over the past five years. The state raised tax revenues to help address the resulting budget gap. These hikes included at least 5% increases in corporate and cigarette taxes. The state also temporarily raised the cap on the corporate franchise tax from $165,000 to $180,000. As a result of these and other changes, state tax revenue increased by more than 9% between 2009 and 2011.

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2. California Increase in personal income tax: more than 5%
Expenditure per capita (2008): $4,196 (25th lowest)
2009 budget shortfall: 36.7% (2nd highest)
Home price decline from peak: 46.7% (3rd largest)

Since 2009, few states have had more serious budget challenges than California. Spending growth has far outpaced economic growth since 1991, and the gap continues to widen today. For years, the state has been one of the biggest-spenders in the country. TANF (Temporary Assistance for Needy Residents)-eligible residents receive $537 per month for 42.4 months — the second largest amount in the country and the seventh-longest period. The state also spends a great deal on pension beneficiaries.

The recession has made California’s structural deficits larger. Median home values fell by 46.7% from their peak in 2006, and median household income barely increased since then, much less than the average state. In 2010, the state had a $45.5 billion budget shortfall, or 52.8% of its general fund — the largest in nominal terms and the second-worst in the country as a percentage of general fund. Enormous budget gaps have forced the state to cut funding to nearly every major program. The state also has raised taxes substantially, including increases of 5% or more in sales tax, personal income tax, and corporate income tax, which together contribute to an overall increase in revenue from taxes of over 9%.

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3. Illinois Increase in personal income tax: more than 5%
Expenditure per capita (2008): $3,772 (16th lowest)
2009 budget shortfall: 15.1% (11th highest)
Home price decline from peak: 21.7% (13th largest)

Illinois consistently has had among the largest budget shortfalls in the country since 2009. It also was hit extremely hard by the recession. Since its prerecession peak, home values have declined by more than 20%, which is among the worst declines in the country. GDP grew a relatively modest 8.2% between 2006 and 2010, while the average state’s GDP grew at least 10%.

In 2011, the state’s continued financial problems led to a $13.5 billion budget gap, representing 40.2% of the state’s general fund. It was the second-worst budget gap in the country. The state was forced to make spending cuts in all five major categories, including $311 million in cuts to school education in 2011. The state also increased the corporate tax rate from 4.8% to 7% and increased personal income tax from 3% to 5% as part of the fiscal year 2012 budget agreement. The state estimates these measures will raise approximately $7 billion.

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4. New York Increase in personal income tax: more than 5%
Expenditure per capita (2008): $5,353 (12th highest)
2009 budget shortfall: 13.2% (16th highest)
Home price decline from peak: 8.3% (16th smallest)

According to the Tax Foundation, New York has been spending approximately 144% more per person each year than it did in 1977, the first year with recorded data. In 2009, New York spent $18,126 per pupil, more than any other state. It also spent $9,056 per Medicare recipient, also more than any other state.

When creating the fiscal year 2012 budget, legislators confronted a $10 billion deficit, or 17.6% of the total available funds. For that budget, the state was forced to cut funding for the SUNY colleges by 7.6%. Yet, these cuts, and others like it, have not been enough to balance the budget. The state has raised tax revenues by at least 9% between 2009 and 2011, partially by increasing personal income and cigarettes taxes by 5% or more.

(AP Photo)

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5. Rhode Island Increase in personal income tax: between 1% and 5%
Expenditure per capita (2008): $6,093 (5th highest)
2009 budget shortfall: 26.6% (3rd highest)
Home price decline from peak: 27.0% (7th largest)

Between 1977 and 2008, the state of Rhode Island has doubled its spending to $6,093 per person. The increase was driven by some of the biggest state programs in the country. In paying out unemployment benefits, the state covers 46.5% of weekly wages, the second-highest percentage of any state. Rhode Island is also among the top ten per capita spenders for education, Medicaid, and pensions.

According to Brookings, the state’s tax revenue has been declining for decades as a result of a loss of manufacturing jobs. The slowing economy rebounded briefly during the housing boom leading up to the recent recession. Unfortunately, the real estate market collapse has put the state in an even worse position than it was before. Rhode Island has been forced to make across-the-board cuts in spending as well as increase taxes. The state increased cigarette taxes by more than 5%, and it raised personal income tax between 1% and 5%.

(AP Photo)

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6. West Virginia Increase in personal income tax: more than 5%
Expenditure per capita (2008): $4,648 (18th highest)
2009 budget shortfall: N/A
Home price decline from peak: 4.5% (9th smallest)

West Virginia is different from the other states that increased revenue from taxes. While budget gaps were among the worst for five of the six states, deficits have remained low in West Virginia. In 2010, the worst year for state deficits across the country, the state’s budget shortfall was only 8.2% of general funds, the seventh-smallest gap in the country.

This relatively modest deficit is likely the result of how well the state weathered the recession. In 2009, unemployment was only 7.7%, much lower than the national average. Similarly, home values fell just 4.5% from their peak, the ninth-lowest decline in the country. Meanwhile, GDP grew 16.8% from 2006 to 2010 and median household income increased 9% between 2006 and 2010, the eighth- and third-highest increases in the country, respectively. While the state has done well, it elected to make increases to personal income and cigarette tax rates by more than 5% between 2009 and 2011. This decision, coupled with strong economic performance throughout the recession, helped the state increase revenues from taxes over 9%. According to a report from the Center for Budget Policy Priorities, the state made no spending cuts to the five major categories by its fiscal year 2011. (AP Photo)

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The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.