Carson City, Nevada — For the first time in 10 years, states cut taxes more than they increased them, according to a preliminary report released last week by the National Conference of State Legislatures (NCSL).
But voters should not draw hasty conclusions about what this means for states’ fiscal health. Most states continued to face substantial budget shortfalls during their 2011 legislative sessions, even though some states saw revenue collections increase.
State actions resulted in a net tax decrease of nearly $2.5 billion, representing 0.4 percent of total state tax collections.
Nine states reduced net taxes by more than one percent, however, an equal number of states reported net tax increases greater than one percent.
Thirty-two states made no significant changes to tax policy.
Some states, like Nevada, tried to hold revenue steady by extending temporary tax increases that were scheduled to expire.
Sales taxes experienced the largest cuts, at what was projected to be a revenue dip of more than $5.2 billion. Some states also cut corporate income taxes.
States raised taxes in all other categories, though, including personal income tax, which saw the largest expected net increase, nearly $2.5 billion. The boost is mostly explained by a rate increase in Illinois that is expected to generate $6.5 billion.
The health care category recorded the second largest tax increase. New assessments on health care providers in a number of states are expected to generate in $1.9 billion in additional revenues.
Three trends emerged in state legislatures in 2011.
Many states allowed temporary taxes to expire, many of which were approved in 2009 for a period of two years. In addition, states focused on reforming or reducing business taxes.
Finally, in order to help cover rising Medicaid costs, many states raised health care provider taxes.
While not rising to the level of trends, a few other tax actions were common.
As in past years, several states broadened their tax bases by reducing credits and exemptions in various categories.
Policy makers also continued to search for new sources of revenue by targeting digital and on-line sales.
Others focused on tax policies designed to jump-start local economies with new incentives to create jobs and develop small businesses.
Some states also examined the estate tax with renewed interest.
States also generated new revenues through fees, accelerations and other non-tax actions.
Six states increased personal income taxes while 21 states cut them.
Corporate and Business Taxes
Lawmakers in many states focused on reducing business taxes during their 2011 legislative sessions. As a result, 20 states cut corporate taxes while eight states raised them for a net decrease of $807 million.
The Nevada legislature extended several temporary business taxes for another two years but as part of a budget deal, the state’s payroll-based business tax was completely eliminated for small businesses.
Michigan cut business taxes by more than $1 billion as part of a major tax restructuring measure.
Lawmakers in Delaware approved three separate business tax cuts: the gross receipts tax (across the board by three percent), the bank franchise tax and the gas and electric utility tax.
Indiana legislators voted to phase-in a corporate income tax cut over the next give years, and Arizona will also reduce its corporate income tax rate over four years from 6.968 percent to 4.9 percent.
Florida raised the corporate income tax standard exemption from $5,000 to $25,000 and increased research and development credits.
Numerous states also enacted various types of jobs tax credits including Arizona, Oklahoma, Virginia and Wisconsin.
States that increased business taxes in some way, shape or form included Illinois, Connecticut and Alabama.
Sales and Use Tax
Twelve states decreased general sales taxes, and seven raised them for a net decrease of about $5.2 billion.
The expiration of a temporary rate increase in California accounts for the bulk of the reduction, while much of the increase is attributable to the sales tax base expansion in Connecticut.
Other sales tax cuts include:
North Carolina lawmakers let expire a one percent temporary sales tax rate increase for a total revenue reduction of nearly $1 billion.
New York approved a sales tax exemption for clothing items costing less than $55 until March 31, 2012. After that, clothes that cost up to $110 will be exempt. The total revenue loss is estimated at $300 million.
Arkansas reduced sales taxes by more than $26 million for FY 2012. Lawmakers cut the sales tax rate on groceries by 0.5 percent and reduced the sales tax rate that manufacturers pay on natural gas and electricity. Arkansas lawmakers also approved their state’s first sales tax holiday on clothing and school supplies.
West Virginia reduced the sales tax rate on food from three percent to two percent.
States that extended or increased sales taxes include:
Nevada extended a temporary sales tax increase for another two years, with the revenues earmarked for school support.
Policy makers in Connecticut raised the general sales tax rate from 6 percent to 6.25 percent and raised the rate on certain luxury items to 7 percent. Connecticut also expanded its sales tax base to a number of services including pet grooming, spa services, cosmetic surgery, motor vehicle towing, yoga classes and non-prescription medicine, among others.
Hawaii expects to generate $170 million by suspending for two years certain exemptions from the general excise tax.
California lawmakers approved a measure requiring some retailers to collect taxes on remote sales, and Texas expanded the definition of “nexus” for sales tax collections.
Georgia expects to generate an additional $18 million by bringing the state sales tax into full compliance with the streamlined sales tax agreement.
Rhode Island extended its sales tax to include a number of previously exempt items including nonprescription drugs, travel and tour company products, auto insurance proceeds, and prewritten downloaded software.
More states raised miscellaneous taxes than reduced them, but the cut in California’s ad valorem car tax was large enough to offset all the other tax increases and resulted in an anticipated net reduction of more than $900 million.
States cut a variety of other taxes:
Oklahoma reduced the annual tax on coin-operated vending machine decals.
Ohio eliminated the state estate tax for deaths after Jan. 1, 2013.
Indiana reduced the tax on racino slot machine wagering.
Other states raised some miscellaneous taxes:
Nevada will raise additional revenues by changing its tax on net proceeds of minerals.
Illinois reinstated its estate tax to generate more than $180 million a year.
Connecticut raised estate taxes and also established a new tax on the generation of electricity for an additional $71 million. In addition, Connecticut raised the hotel room occupancy tax.
South Dakota extended its temporary tourism tax increase for another two years.
The NCSL report aggregated information from all 50 states and figured total increases and decreases as follows:
– Personal income taxes (net increase: $2.478 billion)
– Corporate and business taxes (net decrease: $807 million)
– Sales and use tax (net decrease: $5.245 billion)
– Health care provider and industry taxes (net increase: $1.956 billion)
– Tobacco, alcohol and motor fuel taxes ($88 million)
– Fees and other non-tax changes ($1 billion).
Editor’s Note: The National Conference of State Legislatures is a bipartisan organization that serves the legislators and staffs of the states, commonwealths and territories. Ellizabeth Crum is the editor and founder of Nevada News Bureau where this story first appeared.