Milton Friedman once said that “nothing is more permanent than a temporary government program.” However, it turns out that nothing may be as permanent as a temporary 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. increase, either. According to a new report from the Urban Institute, many of the temporary taxes created to fill state budget gaps during the 2008 recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. have stuck around passed their expiration date.
The group found that between 2008 and 2011, 14 states and the District of Colombia enacted 25 temporary tax increases, 10 of which have been extended or been made permanent and three of which have been replaced with other increases. Of the remaining 12, nine have expired and three are still in their in original periods.
|
State |
Policy |
Status |
|
Arizona |
Increase sales tax from 5.6% to 6.6% |
Expired |
|
California |
Increase personal income by 0.25 percent |
Expired but replaced |
|
California |
Increases sales tax from 7.25% to 8.25% |
Expired but replaced |
|
Colorado |
Increased tobacco product tax |
Permanent |
|
Connecticut |
Add 10% corporate income tax surcharge |
Extended and increased to 20% |
|
Delaware |
Increase top rate ($60,000) from 5.95% to 6.95% |
Permanent at 6.6% |
|
Delaware |
Increase minimum tax |
Permanent |
|
Delaware |
Calculate estate tax based on 2001 federal law |
Permanent |
|
D.C. |
Increase sales tax from 5.75% to 6% |
Expired |
|
Hawaii |
Increase lodging tax from 7.25% to 9.25% |
Permanent |
|
Hawaii |
Create new top rate plus exemption phase-out |
Still in temporary period |
|
Illinois |
Increase corporate rate from 4.8% to 7%, phasedown in 2015 to 5.25% |
Still in temporary period, but possible extension |
|
Illinois |
Increase individual tax from 3% to 5%, phasedown in 2015 to 3.75%, 3.25% after 2024 |
Still in temporary period, but possible extension |
|
Kansas |
Increase sale tax from 5.7% to 6.3% |
Permanent at 6.15% |
|
Maryland |
Create top rate of 6.25% over $1 million |
Expired |
|
Nevada |
Additional tax on wages over $62,500 |
Extended |
|
Nevada |
Increase sales tax from 6.5% to 6.85% |
Extended |
|
New Jersey |
Increase taxes on over $400,000 and create top bracket for over $1 million |
Expired |
|
New York |
Tax on $500,000 plus at 8.97%, married filing jointly $300,000 plus at 7.85%. Limited deductions for $1 million plus earners. |
Replaced with another temporary tax |
|
North Carolina |
Create corporate tax surcharge and expand credits |
Expired |
|
North Carolina |
Added 3% surcharge to top earners |
Expired |
|
North Carolina |
Increase sales tax from 6.75% to 7.75% |
Expired |
|
Oregon |
Increased corporate rate for business over $250,000 |
Expired |
|
Oregon |
Increased taxes $250,000-$500,000 to 10.8% and 11% above $500,000 |
Expired |
|
Oregon |
Added 50 cent surcharge per bottle of distilled liquor |
Extended |
While most increases were one percent or less, some states aggressively increased rates. Illinois experienced one of the most significant temporary tax increases, raising its flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. from 3 percent to 5 percent on individual income and 4.8 percent to 7 percent on corporate income. These programs are still under their original temporary periods. However, as the first rollback quickly approaches, discussions are already underway to make them permanent. Hawaii will likely face the same debate.
The fact that half of temporary taxes become permanent should be no surprise. In most situations, the tax increases have been extended at least once, if not more. This effectively creates a new tax baseline in the minds of many taxpayers and lawmakers, making it more difficult to argue for a “tax cut” that actually restores the original rates, as promised.
Even those that have expired didn’t do so without a fight. Maryland considered making its tax increase on top earners permanent in order to create a special teacher pension fund. Arizona’s increase on sales taxes was another that drew debate over permanence when a special interest group lobbied for a permanent increase, though voters rejected the initiative.
Rather than temporary increases, lawmakers should look to broad tax bases and eliminating special carve-outs, keeping rates lower for all tax payers.
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