- The Washington Times - Tuesday, December 23, 2008

Governors want to levy higher taxes next year on clothes, soft drinks, gasoline, auto licenses and other items that likely will hit low- and middle-income families struggling to make ends meet in a deepening recession the hardest.

Officials say they are required by law to balance budgets and that tax increases are necessary as state governments face sharply declining tax revenues, but fiscal analysts say raising these taxes during an economic downturn will only worsen local economies and prolong the recession.

One of the most sweeping revenue packages comes out of New York, where Democratic Gov. David A. Paterson wants to raise $4 billion with 137 new or increased taxes and fees in the budget, including an 18 percent so-called “anti-obesity tax” on non-diet soft drinks. Satellite TV, cigars and professional licensing fees also are targets.

“Middle-income families do not get wage increases during a recession, but neither should the states. Families have to cut back, and so should state government. They should cut spending,” said Chris Edwards, who tracks state budgets at the libertarian Cato Institute. “These states should have been retrenching after budget increases of 7 percent over the last two years, but they repeated the same mistakes they made in the late ‘90s, assuming the good times were going to last forever.”

In its annual report on the states’ fiscal conditions, the National Governors Association reported last week that “most states experienced poor fiscal conditions in 2008, with conditions for fiscal 2009 continuing to deteriorate and expected to continue to severely decline as the national recession deepens.”

“Virtually all states are now in recession or at risk, and states expect continued expenditure pressures from a variety of sources, including Medicaid, employee pensions and infrastructure,” the NGA report said.

But spending critics said that not enough attention was being paid by the national news media to the plight of taxpayers, whose incomes were being stretched even further by rising sales taxes and fees, and higher property taxes.

“Most reporters are covering the state budgets and thinking ‘Oh, the poor states,’ and no one is looking at this from the perspective of the taxpayers who are the ones whose wallets are going to be on the line,” said political strategist Trent Duffy.

While states are generally holding the line on income taxes, analysts said, many are pushing tax and fee increases on products, services, licenses and businesses that most people consider necessities. Among them:

cNew York’s Mr. Paterson also is proposing to end property-tax rebates and to raise state fees on motor-vehicle registration, auto insurance and state parks. He’s pushing for higher tuitions at state universities and proposes to extend the sales tax to clothing and shoes under $110. He wants to raise taxes on car rentals, beer and wine, and gasoline.

cIn Oregon, Democratic Gov. Theodore R. Kulongoski’s $15.8 billion budget is calling for higher taxes on hospitals, health insurers, cigarettes, gasoline, vehicle registrations and corporations. He wants to push the gas tax up by 2 cents to 26 cents a gallon and raise vehicle-registration fees from $27 a year to $81, which would raise more than $1 billion over the next two years.

Hospital officials said the tax would hit health care facilities across the state “at a time when Oregon’s hospitals are facing a severe downturn in their net operating revenue.”

cIn California, Gov. Arnold Schwarzenegger, a Republican who won election by promising not to raise taxes, is proposing a 1.5 percent increase in the sales tax, which is now set at 7.25 percent. He also wants to raise the motor-vehicle registration fee by $12. His critics say both taxes are regressive because they hit low- and middle-income taxpayers the hardest.

cGov. Butch Otter of Idaho, a Republican, is asking the Legislature to raise vehicle-registration fees, raise the 25-cents-per-gallon gas tax and broaden the sales tax to include rental cars.

c In Kansas, Gov. Kathleen Sebelius, a Democrat, and state legislative leaders are calling for a major cigarette-tax increase, between 50 cents and 75 cents a pack, to help finance health care programs. The proposals come in the wake of a report from budget analysts that said state tax revenues would fall by more than $211 million in fiscal 2009 and plunge even more in fiscal 2010.

Like Mr. Schwarzenegger, other governors who had vowed never to raise taxes appear to be changing their minds in the face of declining revenues. Nevada Gov. Jim Gibbons, a Republican, refused to raise taxes this year, calling instead for $1.2 billion in spending cuts. But now he is saying, “Nothing is off the table this time.”

Wisconsin legislators are considering tax and fee increases, and South Dakota is weighing a higher gas tax.

Cities, too, have been raising taxes and in some cases cutting payrolls.

New York Mayor Michael R. Bloomberg is planning to raise property taxes by 7 percent, increase the tax on hotel rooms, and cut 3,000 jobs from the city’s payroll in an attempt to shrink a $4 billion budget shortfall over the next two years.

“The gravity of the budget situation requires us to propose both deep spending cuts and revenue increases starting right now,” the mayor said last month.

At a conference of state legislators last week, a top official at Standard & Poor’s, which issues credit ratings to state and local governments, said the worsening recession would force them to raise taxes as well as cut spending.

“You’re going to have to bite the bullet and accept there are going to have to be significant budget cuts and tax increases as well,” said chief economist David Wyss.

But fiscal conservatives said that raising taxes in a recession would only worsen the budget outlook for the states.

“Even die-hard Keynesians would tell these governors that raising taxes in the middle of an economic slowdown will only perpetuate the recession cycle,” said Pete Sepp, spokesman for the National Taxpayers Union.

One positive trend among the states in this economic decline is the reluctance to raise income taxes, fiscal analysts said.

“The only good news is that the politicians know it’s bad politically and bad for the economy to raise tax rates at a time like this,” Cato’s Mr. Edwards said.

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