Temporary Could Mean Permanent When It Comes To Taxes

November 17, 2014

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 tax 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 recession 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 tax 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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