Some States Approve Last Minute Budgets

July 1, 2009

For many states, Fiscal Year 2010 starts today. Several states went down to the wire in passing their budgets:

Arizona Sends Budget to Governor Without Sales Tax Increase: At about 3AM, lawmakers approved a budget plan that does not include either Gov. Jan Brewer’s (R) requested 1% increase in the sales tax, nor a suggested 2.8% flat income tax proposal. Brewer has ten days to sign or reject the budget.

California Still Negotiating: Gov. Arnold Schwarzenegger (R) has threatened to veto any budget that includes tax increases, but the Legislature is pushing a plan that raises vehicle and tobacco taxes, and imposes an oil severance tax, and no agreement is close. Without changes, the state’s continuation budget would involve spending $2 billion more per month than the state takes in with revenue. The state’s comptroller is preparing to issue $3 billion in IOUs to fund July expenses.

Connecticut Still Negotiating: Last-minute talks did not reach agreement, and Gov. M. Jodi Rell (R) issued an executive order to spend $1.4 billion on essential services through July (essentially all state operations except local grants). Rell has previously vetoed a spending plan that included an increase in the state income tax from 5% to 7.5%.

Delaware Hikes Income Tax and Franchise Tax: Just before dawn, Gov. Jack Markell (D) signed into law the state’s budget, which cuts state employee pay by 2.5% and raises the state’s top income tax rate by 1% to 6.95% for four years, following rejection of an effort to increase liquor taxes. The state’s gross receipts and corporate franchise taxes also went up.

Illinois Still Negotiating: For the third year in a row, Illinois started July 1 without a budget. Gov. Pat Quinn (D) has threatened to veto any budget that is “underfunded,” and is urging a 50% increase in income taxes. The House this week passed a measure to borrow $2.2 billion, paid off over the next five years, to fund initial operating expenses, but Quinn urged the Senate to reject the measure. The Legislature has been in special session since last week and continues to meet.

Indiana Approves Budget With No Tax Increases: The Legislature approved the budget with five hours to spare, and it includes parameters set by Gov. Mitch Daniels (R): no tax increases, keeps $1 billion in state reserves, has cuts for any spending increases above his recommended spending level, does not borrow from pension funds, and uses stimulus funds for one-time purposes (infrastructure and final grant installments). Democrats say the plan will kill off public schools (the plan increases education spending by 1.3%).

Massachusetts Hikes Sales Tax: Gov. Deval Patrick (D) signed the state’s budget on Monday, which includes an increase in the state sales tax from 5% to 6.25%. Taxes on hotels, alcohol, meals, and satellite dishes also went up. Towns bordering New Hampshire are especially wary of the sales tax increase.

Mississippi Budget Includes Hospital Tax: Mississippi lawmakers reportedly approved the state’s budget late last night after a three-day special session. The bill includes a proposal by Gov. Haley Barbour (R) to tax hospitals to fund Medicaid, a key sticking point.

New Hampshire Hikes Some Taxes: Gov. Jon Lynch (D) signed into law the state’s budget, which increases the cigarette tax by one-third to $1.78 per pack, increases restaurant and hotel taxes to 9%, and imposes a 5% dividends tax on limited liability companies (LLCs). A new 10% tax on gambling winnings over $600 was also enacted, as well as increased car and boat registration fees.

New Jersey Raises Taxes: Gov. Jon Corzine (D) signed into law the state’s budget, which imposes three-year taxes on high-income earners: 8% on income over $400,000; 10.25% on income over $500,000; and 10.75% on income over $1 million. [Different news reports say the top rate is 10.75%, 10.76%, or 10.97%. We’re fairly sure it’s 10.75%.] The cigarette tax goes up to $2.70 per pack, and taxes on liquor and wine (but not beer) are also increasing.

North Carolina Still Negotiating: Lawmakers approved a two-week temporary budget, cutting General Fund spending by 15%, while they debate between the House plan to raise the sales tax by a quarter point and impose a higher income tax on those making more than $200,000 a year, and the Senate plan to lower sales and income tax rates but broaden the sales tax. Expiring today is a cap on the state’s gas tax, which normally changes with wholesale prices each year but has been prevented from doing so for several years. Experts predict that the gas tax may go up about 10 cents per gallon due to the change, which includes a new floor to prevent the gas tax from dropping. Suggestions that North Carolina may force out-of-state Internet companies with in-state affiliates to collect North Carolina taxes led to ending its North Carolina commission program.

Ohio Still Negotiating: Gov. Ted Strickland (D) approved a 7-day temporary budget, cutting General Fund spending by 30%. Strickland is pushing to raise money by installing video lottery terminals in state horse-racing tracks.

Oregon Hikes Income Tax: Gov. Ted Kulongoski (D) plans to sign a budget that imposes a three-year high-income earners income tax of 11%, tied with Hawaii for the highest state income tax rate in the country. The bill also increases the corporate minimum tax from $10 to a sliding scale topping out at $100,000. Opponents of the tax increases may take them to the ballot.

Pennsylvania Still Negotiating: Officials continued negotiations last night with no breakthrough. Gov. Ed Rendell (D) is pushing a three-year increase in the state’s flat income tax from 3.07% to 3.57% and rejects the idea of spending less than last year, while Republicans are pushing spending cuts. Unless a budget is enacted, state workers will receive partial paychecks on July 17 and 24 and none thereafter.

Rhode Island Keeps Optional Flat Tax: Gov. Don Carcieri (R) said in a statement that would have preferred to veto the budget or let it become law without his signature, but the inevitability of it being enacted over his objections and the short timeframe led to him signing it yesterday. Carcieri’s proposal to eliminate the corporate income tax was not enacted, although the state will keep its optional flat tax, which we discussed here. The estate tax exemption was increased to $850,000, short of Carcieri’s recommended $1 million. The budget also increases the state’s unique lower rate capital gains taxes, raises the gas tax by 2 cents, and imposes a tax collection obligation on out-of-state Internet companies with in-state associates. responded to the budget by firing its Rhode Island affiliates.

Wisconsin Raises Income Tax: Wisconsin’s budget, approved by Gov. Jim Doyle (D), imposes a new top income tax bracket of 7.75% on income over $225,000, up from 6.75%. The film tax credit also becomes refundable.

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A 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.

A 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.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.