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Tax Collections Surge ? States Hit Fiscal ?Sweet Spot?

2 min readBy: Jonathan Williams

According to the latest “Fiscal Survey of States” report released by the National Association of State Budget Officers (NASBO) and National Governors Association (NGA), 2006 was an exceptional year for state treasuries. From State TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Today:

“Continued strong revenue growth has allowed states to stockpile the biggest rainy day funds since 2001, while increasing spending and cutting taxes,” said Scott Pattison, executive director of the National Association of State Budget Officers (NASBO).

In fiscal 2006 revenue exceeded expectations in 46 states, while it was on target in four others, Pattison said. Corporate tax collections were 20.5 percent higher than expected, personal income tax revenue was 6.6 percent higher, and sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. revenue was 2.3 percent higher than expected.

“States are in what I would call a sweet spot,” [NGA Executive Director Raymond] Scheppach said.”

The remarkable surge in state tax collections offers lawmakers a golden opportunity. Instead of simply finding more government programs to consume surplus dollars, state lawmakers would be wise to invest surplus funds for a rainy day.

The best long-term investment strategy is to use surplus funds to improve business tax climates. Today, labor and capital are more mobile than ever and therefore, business investments are increasingly sensitive to tax changes. In the competitive business environment of the 21st Century, domestic businesses compete in the global market for investment. Therefore, it is essential for states to structure their tax systems in a manner that allows them to compete for global investment.

Due to the high corporate tax rate in the United States, domestic companies already begin with a disadvantage when facing foreign competition for investment. A recent Tax Foundation study pointed out that America’s top combined tax rate on corporate income is the second highest in the developed world.

If lawmakers do the right thing and invest these tax surpluses to improve their business tax climates for the future, it would be a major economic development tool and help states compete in the international marketplace. Increasing the competitiveness of business tax climates would go a long way to ensure current fiscal “sweet spots” are more than short-term experiences for states.

To learn more about the competitive position of individual state tax structures, click here.