A new Tax Foundation analysis of changes to state tax law in 2010 shows that most of the states that raised taxes in 2010 have pursued short-term budget fixes and have aimed the increases at specific groups rather than enacting broad-based reforms. These strategies will likely cause harm to many states’ economies in the short and long term, requiring even more unpopular tax increases in the coming years.
Due to a combination of improving revenues and growing political opposition to increased state-level taxes and additional federal aid to states, 2010 was a lighter year on state-level tax changes than anticipated, the report notes. But as temporary federal stimulus aid ends in mid-2011 and with many states still not balancing their projected revenues with desired expenses, 2011 may be a year of dramatic tax increases.
“When the recession ends, states need to have the right policies in place to promote economic growth and maintain revenue stability,” said Tax Foundation Director of State Projects Joseph Henchman. “Relying more heavily on taxes on high-income individuals and corporations, and shifting burdens out-of-state can make a state less attractive and create more volatility in an already uncertain economic climate.” Henchman is the author of Tax Foundation Special Report No. 188 “State Tax Changes During 2010.”
Summary of 2010 State Tax Changes
- Individual Income Taxes
Oregon voters approved two new high-earner brackets, tying Hawaii for the highest rates in the nation. In California, rates dropped slightly after the end of the year, but Gov. Jerry Brown has promised to submit a referendum to the state’s voters that would raise them again. Maryland’s 6.25 percent “millionaire’s tax” expired, and Gov. Chris Christie vetoed an effort to renew New Jersey’s own millionaire’s tax, which had expired at the end of 2009. Rhode Island adopted a tax reform package which reduced the number of brackets from five to three and lowered the top rate from 9.9 to 5.99 percent.
- Corporate Income Taxes
Kansas and Massachusetts reduced their corporate tax rates, while Ohio completed a five-year replacement of its corporate income tax with a tax on gross receipts. Iowa, Connecticut, and Washington all sought to tax more out-of-state activity.
- Excise Taxes
Seven states (Hawaii, Minnesota, New Mexico, New York, South Carolina, Utah, and Washington) raised cigarette taxes, down from 18 states which did so in 2009. Several states considered soda taxes but only Colorado and the District of Columbia acted to remove sugared beverages from the list of groceries that are exempt from sales tax. (Washington adopted a soda and candy tax which was repealed by voters.) California swapped part of its sales tax on gasoline for an increased excise tax, while gas taxes in Nebraska, Minnesota, and Oregon all increased.
- Other State Tax Changes
The year 2010 saw the first ever decline in the number of states offering film tax credits, as four states (Arizona, Iowa, Kansas and New Jersey) either suspended or ended their programs. Hawaii enacted a $1 per barrel tax on all petroleum products, while Wyoming passed a $1 per megawatt hour tax on wind energy generation. Hawaii also resurrected its estate tax, which had lain dormant since 2005, and Rhode Island raised the exemption level for its estate tax from $675,000 to $850,000. The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
