Tax Foundation Report Outlines Significant State Tax Changes in 2010
Most Tax Hikes Aimed at High-Income Earners, Smokers, Out-of-State Business Transactions
Washington, DC, August 23, 2010 A new Tax Foundation analysis of significant state tax changes in 2010 shows that some states have enacted targeted tax increases or turned to the politically convenient option of one-time funds and accounting gimmicks to fill budget gaps. So far in 2010, five states have seen changes to their individual income tax structures, two states have had sales tax rate increases take effect and five states enacted cigarette excise tax increases.
“Much like the 2009 federal stimulus funds, which run out next year, the recently passed $26 billion stimulus will do little more than paper over states’ budget woes,” said Tax Foundation Tax Counsel and Director of State Projects Joseph Henchman, who co-authored the new report. “Aside from the politically easy options of one-time aid, borrowing and other accounting gimmicks, states have two choices: raise taxes or cut spending.”
“States that have chosen to raise taxes this year have targeted specific groups, such as high-income earners, smokers and out-of-state business transactions,” said Henchman, who wrote the report with Adjunct Scholar Xander Stephenson. The report, “A Review of 2010’s Changes In State Tax Policy,” is No. 241 in the Tax Foundation Fiscal Fact series and is available online at http://www.taxfoundation.org/legacy/show/26645.html.
Among the income tax changes, Oregon voters in January upheld a so-called “millionaire’s tax” measure, which creates two new income tax brackets: 10.8% on income over $125,000 and 11% on income over $250,000. Ohio postponed for one year a planned 4.2% reduction in income tax rates, which had been scheduled to begin in January 2010.
New Jersey rejected calls to renew its temporary “millionaires’ tax” rates – with a top rate of 10.75% – which expired at the end of 2009. Rhode Island enacted tax reform that goes into effect January 1, 2011 that eliminates the optional flat-tax method of preparing individual income taxes, reduces the number of brackets from five to three and lowers the top rate from 9.9% to 5.99%.
In June, Maine voters repealed a year-old law that replaced its four-rate income tax structure, which had a top rate of 8.5%, with a flatter income tax and a top rate of 6.85%.
Sales tax rates increased in Arizona and Kansas, from 5.6% to 6.6% and 5.3% to 6.3%, respectively. Arkansas decreased its sales tax on groceries from 3% to 2%. Colorado approved an “Amazon tax” law designed to compel out-of-state businesses to collect the state’s use tax from consumers. Nineteen states are holding sales tax holidays this year, exempting purchases of specific goods from the general sales tax.
Hawaii, New Mexico, New York, South Carolina and Utah increased cigarette excise taxes this year (18 states did so in 2009). Colorado removed sugared beverages and candy from the list of groceries that are exempt from the state’s general sales tax. Washington state enacted a new soda tax of 2 cents on every 12 oz. can, and extended the general sales tax to candy.
Nebraska raised its gasoline excise tax from 27.3 cents to 28 cents. Eleven states began selling PowerBall tickets this year, bringing the total number of states participating in the multistate jackpot game to 42.
“When the recession ends, states need to have the right policies in place that will promote economic growth and maintain revenue stability,” Henchman said. “Relatively high taxes on high-income individuals, smokers, and out-of-state business transactions can make a state less attractive and create more volatility in an already uncertain economic climate.”
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.